Securities America won't be stranded

Ameriprise Financial Inc. is willing to spend nearly $200 million to bail out its beleaguered independent-broker-dealer subsidiary, Securities America Inc., because the spectacle of its collapse would be a huge embarrassment for the financial planning giant and draw the ire of regulators, according to securities industry experts. Last week, Ameriprise and Securities America upped their offer to investors who lost $400 million on two private placements that Securities America sold and the Securities and Exchange Commission later charged were fraudulent. The new offer would reimburse investors up to 48 cents for every dollar lost in the alleged schemes, a total of $192 million, and represents a significant increase from the 15 to 20 cents on the dollar the companies offered just a few weeks ago. When that settlement offer was rejected by a federal court judge, speculation mounted that Ameriprise simply might let financially strapped Securities America go out of business. After all, the firm itself said that it might be forced to shut down because of mounting legal expenses if it could not resolve investor claims. The latest settlement offer, which would apply to investors who have filed arbitration claims and those who are part of a class action, must be approved by plaintiffs. Like many independent broker-dealers, Securities America is thinly capitalized and has razor-thin profit margins. At the end of last year, it had about $9 million in excess net capital and is burning through about $2 million a month on lawyers' fees in defense of lawsuits and arbitration claims stemming from the sale of two controversial private placements, Medical Capital Holdings Inc. and Provident Royalties LLC. According to testimony from a March 18 hearing in federal court in Dallas, Securities America's revenue has averaged $466 million over the past few years, with historical margins of about 2%. Not taking into consideration ticket charges and other fees, the firm had a profit of about $9 million per year. That is a blip when compared with Ameriprise, which posted profit of $1 billion last year. But while Securities America may not be too big to fail, its parent company, Ameriprise, is too big to let it fail, industry observers said. “Any large financial company has to be concerned about its relationship with regulators going forward if it allowed one of its broker-dealers or investment advisory subsidiaries to go bankrupt,” said Steven Insel, an attorney who focuses on broker-dealer mergers and acquisitions. “It ought to be embarrassing for a financial planning firm to have a subsidiary go bankrupt,” said Brian Smiley, a plaintiff's attorney who isn't involved in the Securities America litigation Chris Reese, an Ameriprise spokesman, declined to comment. In its most recent annual report, Ameriprise said as a leading seller of financial planning services, it is keenly aware of the value of its reputation. “A failure to protect our reputation could adversely affect our business,” the company said.

HARM TO CREDIBILITY

Ameriprise is also aware of the potential harm to its credibility stemming from litigation, attention from securities regulators and ethical lapses. “Damage to our reputation could cause significant harm to our business prospects and may arise from numerous sources, including litigation or regulatory actions, failing to deliver minimum standards of service and quality, compliance failures, unethical behavior and the misconduct of employees, affiliated financial advisers and counterparties,” it stated in the annual report. And Ameriprise chief executive James Cracchiolo makes no bones about the importance of the company's financial advice business. In February, he said that the company is “really focused back on the core drivers of the future, our advice and wealth [management groups] and our asset management [group].” All told, Ameriprise has 11,400 brokers and advisers in its network. About 1,800 of those are independent contractors with Securities America. The multimillion-dollar legal quagmire at Securities America has been unfolding since the SEC charged the private-placement sponsors with fraud in 2009. Although dozens of independent broker-dealers sold MedCap and Provident Royalties notes, Securities America was by far the biggest seller. Of the $400 million in losses, about one-third have resulted in investors' filing arbitration claims with the Financial Industry Regulatory Authority Inc. against the firm. Two states, Massachusetts and Montana, sued Securities America last year. Montana is to begin its hearing against the firm this month, and a ruling from Massachusetts is expected by the end of May. Securities America officials repeatedly have stressed that the firm did no wrong and performed industry-leading due diligence when selling the products. E-mail Bruce Kelly at bkelly@investmentmews.com.