Three independent broker-dealers are suing their respective insurance carriers for failing to cover investors' legal claims, with one charging that its insurer has exposed it to “financial ruin”
Three independent broker-dealers are suing their respective insurance carriers for failing to cover investors' legal claims, with one charging that its insurer has exposed it to “financial ruin.”
The broker-dealers, Next Financial Group Inc., Berthel Fisher & Company Financial Services Inc. and Brecek & Young Advisors Inc., allege that the insurance carriers are refusing to meet the maximum coverage amounts for claims that investors have filed over various private placements, real estate investments and unsuitable investment products.
The insurance carriers, however, contend that the maximum coverage is millions of dollars less than the broker-dealers seek, because the investors' lawsuits are related to one another and arise, at least in the case of Next Financial and Berthel Fisher, from the failure of a specific product.
For example, in Next Financial's lawsuit against Arch Specialty Insurance Co. in U.S. District Court in Dallas, the broker-dealer's amended complaint, which was filed last month, claims that it has liability limits of $2 million per occurrence and a total coverage limit of $15 million per policy period.
Next Financial has $9.5 million in claims stemming from its sales of Provident Royalties LLC private placements and wants Arch to cover them. Arch, in its counterclaim, alleges that the maximum amount it should pay is $2 million because all the claims are related to one product.
Next Financial is one of the firms named in a class action, also in federal court in Dallas, alleging damages by broker-dealers as a result of the sale of Provident private placements. Next Financial is alleging that Arch is in breach of contract and that its positions make resolution of the class action “impossible and expose Next to financial ruin.”
In total, Next Financial sold $43 million of Provident and received more than $3 million in commissions and fees. Provident, which raised $485 million and sold its oil and gas deals through dozens of independent broker-dealers, was charged with fraud in 2009 by the Securities and Exchange Commission.
Barry Knight, chief executive of Next Financial, didn't return calls last week seeking comment.
Conflicts between broker-dealers and insurance carriers over whether claims can be bundled together or are “interrelated” are becoming more common, industry executives and attorneys said.
If firms are thinly capitalized and have little cash reserved for legal costs and lawsuits, the results could prove debilitating, particularly if firms suffer big dollar losses in arbitration claims, executives said
Before it closed its doors this month, QA3 Financial Corp. was also involved in a lawsuit with its insurance carrier, Catlin Specialty Insurance Co., disputing the extent of its coverage over private investments, claiming that it faced bankruptcy if the matter was not resolved. (See related stories on Pages 4 and 16.)
In the dispute between Berthel Fisher and Arch, the former is claiming $7 million in aggregate coverage, while the latter is claiming a $1 million limit to all related claims. Berthel's lawsuit is in federal court in Cedar Rapids, Iowa.
As with Next Financial, the Berthel claims stem from client lawsuits regarding one product.
In this case, it wasn't a private placement but a series of real estate deals known as tenant-in-common exchanges that were packaged by DBSI Inc. DBSI filed for Chapter 11 bankruptcy protection in November 2008.
The trustee in the DBSI bankruptcy is seeking to claw back $49 million in commissions from broker-dealers that sold DBSI. Berthel reportedly generated $5.6 million in commissions from DBSI, according to bankruptcy court documents.
According to the Berthel and Arch lawsuits, investors have filed up to 20 different arbitration claims against Berthel with the Financial Industry Regulatory Authority Inc.
Tom Berthel, chief executive and owner of Berthel Fisher, declined to comment on the firm's lawsuit against Arch, saying only: “I hope there is a resolution to it. I think there can be.”
Mr. Berthel added: “We're not interested in going out of business.”
He said that recent chatter among broker-dealers included “badmouthing” some firms, particularly after the collapse of QA3 Financial this month.
“There's talk of who's next,” Mr. Berthel said, adding that he has no interest in indulging in speculation.
“Let's figure out what caused some of the issues with insurance carriers,” he said. “I'm a little disgusted” with the recent industry gossip about broker-dealers potentially closing, Mr. Berthel said.
Regarding QA3, he said that it was “not good for the industry to have a firm go down like that” and that it was particularly harmful to the advisers and their clients, as they were scrambling to find a firm to land their accounts.
Attorneys for Arch in the lawsuits by Next Financial and Berthel Fisher didn't return calls seeking comment.
Brecek & Young is suing Lloyds of London Syndicate 2003 over an arbitration claim that it settled in 2009 for about $1.4 million, which includes a settlement with investors and legal costs. Lloyds has paid only $390,000 toward Brecek & Young's defense-and-indemnity expenses, according to court filings.
The firm is suing Lloyds in federal court in Kansas City, Kan. David Buchanan, an attorney for Lloyds, didn't return a call seeking comment.
Securities America Inc. acquired Brecek & Young in 2008, and Janine Wertheim, a spokeswoman for Securities America, said that the lawsuit “involves Brecek & Young pursuing coverage for a previously known case that arose prior to Securities America's acquisition” of the firm.
E-mail Bruce Kelly at bkelly@investmentnews.com.
