A cash strapped independent broker-dealer that sold $65.3 million in high-risk oil and gas private placements is seeking to combine 36 separate arbitration claims and lawsuits as part of a class action settlement
A cash strapped independent broker-dealer that sold $65.3 million in high-risk oil and gas private placements is seeking to combine 36 separate arbitration claims and lawsuits as part of a class action settlement.
Two weeks ago, a federal judge in U.S. District Court for the Northern District of Texas ordered that all arbitration claims and lawsuits against Capital Financial Services Inc. be halted until he can decide if they should all become part of a single class action.
Other broker-dealers being sued in the same class action are paying close attention to Capital Financial's pending settlement, industry lawyers and executives said.
Combining all of the pending litigation, which involves the broker-dealers' sales of Provident Royalties LLC private placements, could save them millions of dollars in damages and legal fees.
John Carlson, president of Capital Financial, said he does not know of any other broker-dealer seeking the same type of settlement but added that others will consider it.
“I know some broker-dealers have been listening in and monitoring” the recent proceedings, he said.
Mark Roth, general counsel for National Holdings Corp., parent company of National Securities Corp., one of the other broker dealers being sued, said National Holdings would be interested in a similar settlement, but added that the plaintiffs would have to agree to it too.
Capital Financial and National Securities are among a handful of broker-dealers named in the class action, Billitteri v. Securities America Inc., et al. Other defendants include Next Financial Group Inc. and QA3 Financial Corp.
The lawsuit was filed in August 2009, a few weeks after the Securities and Exchange Commission charged Provident Royalties with fraud for allegedly running a Ponzi scheme. Provident sold $485 million in securities and developed a wide network of independent broker-dealers to distribute the deals, with preferred stock or partnership interests priced at $5,000.
According to court documents, Capital Financial is facing 36 separate legal cases from investors who bought almost $11.9 million in Provident Royalties private placements.
TAPPED OUT
Capital Financial has few assets to pay the claims, according to court filings. Chief among them is $1.4 million of insurance and $120,000 in excess net capital, totaling a pool of $1.52 million.
Back-of-the-envelope math shows that Capital Financial has available about 12 cents per dollar for clients who have sued the firm or are in line to sue the firm.
Arguments for and against combining the arbitrations and other lawsuits against Capital Financial will be heard at a hearing in April, Mr. Carlson said.
At least one individual investor who filed an arbitration complaint against the firm with the Financial Industry Regulatory Authority Inc. has objected to the proposed settlement.
When asked if the proposed settlement would be favorable to the firm, Mr. Carlson said: “Yes, but it's favorable to more than us.” Such a settlement would allow money to reach investors rather than “just be eaten by attorneys,” he said.
According to the Jan. 11 order that froze legal action against Capital Financial, Judge W. Royal Furgeson wrote: “There is a limited fund available that is insufficient to satisfy the claims of investors who purchased Provident securities through Capital Financial.
“The court preliminarily finds that this limited fund is comprised of Capital Financial's remaining insurance assets and the amount of net regulatory surplus capital that Finra has determined Capital Financial can contribute to this settlement,” Mr. Furgeson noted.
The reasoning for the settlement is simple, people familiar with the matter said. Plaintiffs who filed the first claims heard against the firm would receive full awards, while others would get nothing.
“Our job is to make sure our clients get their fair share of the money,” said Daniel C. Girard, managing partner of Girard Gibbs LLP and the lead attorney in the Provident class action.
“All claimants should be treated equally and fairly,” he added.
He declined to comment on whether he is negotiating a settlement with other broker-dealers involved in the matter.
Provident sold shares from September 2006 to January 2009, promising annualized rates of return ranging between 14% and 18%, according to the lawsuit. Investors' principal was supposed to be fully redeemed within two to four years.
Investors paid broker-dealers a 1% “due-diligence fee” when they sold the deals, along with commissions of 5.5% to 8%, according to the lawsuit.
E-mail Bruce Kelly at bkelly@investmentnews.com.
