A Massachusetts lawsuit filed last week alleging that Securities America Inc. misled investors who bought nearly $700 million of private placements from 400 brokers is another indication that leadership at the firm is coming into question.
One of the biggest questions that needs to be answered is: Will parent company Ameriprise Financial Inc. take control of the firm?
January was a bleak month for Securities America, a leading independent broker-dealer with 1,950 affiliated representatives and financial advisers. Things have gotten so bad that the firm has offered certain brokers the opportunity to chat with an industrial psychologist.
It started with the sentencing of former star broker David McFadden to five years in federal prison for a securities fraud scheme in which more than 150 clients lost tens of millions of dollars before they retired.
Then longtime chief executive Steven McWhorter said last month that he is resigning this spring to enjoy retirement and spend more time with his family.
Finally, Massachusetts securities regulators filed the lawsuit last week alleging that the firm failed to reveal pertinent information to investors about high-risk notes issued by Medical Capital Holdings Inc.
Medical Capital is at the head of a conga line of litigation around its offerings and was sued by the Securities and Exchange Commission last summer. The firm's assets are being dismantled by a receiver.
The Massachusetts lawsuit also alleges that brokers sold the private placements to non-accredited in-vestors — those with a net worth of less than $1 million. Such “unsophisticated” in-vest-ors aren't supposed to have access to such high-risk deals.
Meanwhile, Securities America brokers are desperate for information, industry sources said.
“Securities America is in a critical step of the process,” said Jodie Papike, vice president of recruiting firm Cross-Search. “Not only are hundreds of advisers who sold the [private-placement] products looking at the firm to see how they handle this, but prospective reps looking to join the firm are waiting to see how they handle it.”
The firm's “next steps are critical” for advisers, Ms. Papike said.
In an interview last Friday morning, Mr. McWhorter brushed aside concerns about the firm, saying that he thinks the future for Securities America is “bright.”
“The company is in very good shape,” he said. “We celebrated our 25th anniversary last year and had our second-best recruiting year in 2009.”
Mr. McWhorter added that Amer-i-prise was a “great corporate partner” throughout its ownership.
Although he declined to answer specific questions raised by the lawsuit, he said that Securities America is “going to move quickly and decisively in answering these allegations.” Mr. McWhorter said that more than 50 other broker-dealers sold Medical Capital notes.
The lawsuit, filed by the Massachusetts Securities Division last Tuesday, alleges that between 2003 and 2008, a group of Securities America executives re-peatedly failed to heed the warning of an outside due diligence analyst about the risks of private placements.
The group also failed to acknowledge the concerns of some of the firm's top executives, including president and CFO Jim Nagengast, the complaint alleges.
“Year after year, [Securities America] ignored the material risks and disclosure recommendations raised by” due-diligence reports for each Medical Capital Holdings deal, the lawsuit alleges.
Securities America brokers sold the private placements to more than 60 Massachusetts investors who purchased about $7.2 million of the notes, the lawsuit said.
Medical Capital began to default on some notes in August 2008, and today $1.1 billion of private placements are in default status. Securities America reps sold $358 million of those notes.
The Massachusetts lawsuit is seeking restitution to its investors as well as a fine against Securities America.
It contains abstracts of testimony given by Thomas Cross, the firm's former head of sales and chairman of its due-diligence committee, before Massachusetts regulators. In his testimony, he makes some disturbing allegations.
Namely, Securities America was extremely fearful that brokers and clients would learn details of an analyst's report about the Medical Capital private placements.
“If the analyst makes a statement and we put that statement in the hands of the adviser, guess what happens,” Mr. Cross said, according to the lawsuit. “Somehow, that document, in its infinite wisdom, will find its way into the hands of an investor. So somehow, do you figure out a way to get it in a secured server so that nobody can see it, you know, other than the advisers?”
Such a solutions simply didn't fit Mr. Cross' worldview, the complaint states. “The problem, even if you do that, is when you create that, guess what [the advisers] can do? Hit the print screen. Then they can take that document to the investor, and that's just a bad thing.”
Of course, the lawsuit presents Mr. Cross' testimony in truncated fashion, so it's not possible to know in what context he said that.
Mr. Nagengast, who said last week in an interview at the Financial Services Institute Inc.'s annual meeting in New Orleans that he was interested in Mr. McWhorter's job, was one of the executives on the firm's due diligence committee.
In 2005, Mr. Nagengast wrote in an e-mail to Mr. Cross, then chairman of the company's due-diligence committee and head of sales, that he had concerns about the lack of audited financials at the Medical Capital deals, the complaint said.
In the e-mail, according to the complaint, Mr. Nagengast wrote: “We simply have to tell [Medical Capital] that if they don't have financials by [a specified] date, we will stop distributing the product on that date. Then they can decide if it's worth spending $50,000 to have [the audit] done. If they won't spend the money, that should give us concern.”
Securities America “ignored its president's recommendation and continued selling hundreds of millions of dollars of [Medical Capital] notes without the audited financials ever being conducted on any Medical Capital entities,” the lawsuit alleges.
Chris Reese, an Ameriprise spokes-man, did not return a phone call seeking comment.
E-mail Bruce Kelly at bkelly@investmentnews.com.
