Milkie/Ferguson Investments Inc., a small broker-dealer that was a big seller of fraudulent Provident Royalties LLC private placements, has shut down.
But unlike representatives at many other broker-dealers that have closed since the Securities and Exchange Commission charged Provident with running a Ponzi scheme in 2009, Milkie/Ferguson's financial adviser force has been able to make an orderly transition to another broker-dealer.
Berthel Fisher & Co. Financial Services Inc. this summer picked up 26 of the 40 reps formerly with Milkie/Ferguson, said Tom Berthel, chief executive of Berthel Fisher.
Milkie/Ferguson had been looking for an exit for at least two years, he said.
“We did not acquire the assets or liabilities of the firm, and this is primarily a recruiting deal,” Mr. Berthel said, declining to disclose the terms of the recruiting offer.
“We hope they came for our culture, product mix and service,” he said, adding that the reps are based primarily in Dallas and control about $400 million in assets.
“We worked with the regulators to do this,” Mr. Berthel said.
“We're pretty pleased they chose us, obviously,” he said.
Both Milkie/Ferguson and Berthel Fisher use National Financial Services LLC as a clearing firm.
Milkie/Ferguson filed its broker-dealer withdrawal request with the Financial Industry Regulatory Authority Inc. on July 26. The firm this month lost a $25,000 Finra arbitration claim, which wasn't related to Provident, according to the arbitration award.
According to U.S. Bankruptcy Court filings, Milkie/Ferguson reps sold at least $4.1 million of Provident Royalties preferred shares, the 11th most among firms that sold those shares.
The figure may be incomplete, however, as the bankruptcy filing counted only about half the $485 million in Provident shares sold by independent broker-dealers to investors.
Selling Provident preferred shares from 2006 to 2009 turned into a death warrant for dozens of independent broker-dealers. At least 23 of the 60 broker-dealers that sold Provident shares are out of business, many because they were swamped by the cost of fighting clients' lawsuits related to the fraud.
STRUGGLING FIRMS
Started in 1986, and with about 40 brokers and $6.6 million in revenue last year, Milkie/Ferguson was a small firm. Such firms are continuing to struggle due to several factors: equity markets that scare retail investors, rising costs of technology, increased fees from regulators such as the Financial Industry Regulatory Authority Inc. and the fallout from failed investments such as Provident's.
Milkie/Ferguson's chief executive and owner, Edward M. Milkie, has been registered with Berthel Fisher since June.
Mr. Milkie isn't working as a manager at Berthel Fisher but is a producing registered rep, Mr. Fisher said.
Two co-founders of Provident were indicted by the Justice Department on Aug. 8 in connection with the $485 million investment fraud that involved 7,700 investors.
Brendan W. Coughlin, 46, and Henry D. Harrison, 47, were charged by the U.S. Attorney's Office for the Eastern District of Texas in Plano with one count of conspiracy to commit mail fraud and 10 counts of mail fraud, according to a statement by the Justice Department. If convicted, each faces up to 20 years in prison.
An attorney for Mr. Coughlin, David Finn, wasn't available to comment last week.
The Securities and Exchange Commission this year settled a civil suit filed against the two in July 2009 when the Ponzi scheme collapsed, leaving investors and broker-dealers that sold the Provident private placements reeling. Details of the settlement weren't released.
But in an interview last month, the attorney for Mr. Harrison, William Ravkind, questioned the merits of the Justice Department indictment, particularly as it was handed up after the conclusion of a three-year investigation by the SEC and a civil settlement.
“I think the conduct by the Department of Justice is totally improper,” he said.PROVIDENT DEALS
From 2006 to 2009, about 60 broker-dealers and investment advisory firms sold the Provident deals, which promised annual returns up to 18%.
Another Provident executive, Joseph Blimline, pleaded guilty in 2010 in U.S. District Court for the Eastern District of Texas to conspiring to defraud investors who invested in Provident. He also pleaded guilty to a second charge of defrauding Michigan investors in a separate $50 million oil-and-gas scheme.
Mr. Blimline was sentenced in May to 20 years in federal prison for the Provident scheme, according to a statement from the office of U.S. Attorney John Bales.
bkelly@investmentnews.com Twitter: @bdnewsguy
