The dispute between LPL Investment Holdings Inc. and Pacific Life Insurance Co. over liability for rogue brokers is a reminder that unseen risks can be part of any acquisition, no matter how well-vetted, according to lawyers and investment bankers.
The dispute between LPL Investment Holdings Inc. and Pacific Life Insurance Co. over liability for rogue brokers is a reminder that unseen risks can be part of any acquisition, no matter how well-vetted, according to lawyers and investment bankers.
The two firms are staring each other down over which firm will have to pony up the potentially millions of dollars in claims stemming from fraud suits against rogue brokers from the three independent-contractor firms LPL acquired from Pacific Life two years ago.
Even with the most intensive due diligence, risks from brokers' activities and sales practices can remain uncovered, one attorney said.
“You're never going to know all potential liability,” said Dennis Concilla, a partner with Carlile Patchen & Murphy LLP. Last year's revelation that Bernard Madoff created a $65 billion Ponzi scheme has proved that even the largest risks remain hidden for years.
Filings reveal feud
“There's liability out there that none of us could have dreamt of,” he said.
Veiled references to the quarrel between Pacific Life and LPL first surfaced this month in official filings.
This month, in its quarterly earnings report to the Securities and Exchange Commission, LPL said that it was in dispute with an un-named third-party indemnifier “in connection with various acquisitions.”
Until now, the report said, the “indemnifying party” defended and paid “for certain legal proceedings and claims.”
The LPL report said that the firm had received a written notice Oct. 1 from an unnamed third party saying that “under a certain purchase and sale agreement,” the third party “is no longer obligated to indemnify the company for certain claims.”
LPL “believes that this assertion is without merit, and intends to vigorously dispute it,” the report said.
A source close to Pacific Life, who asked not to be identified, said the unnamed third party is “absolutely” Pacific Life.
Recent changes in LPL's clearing agreement with the former Pacific Life reps could have triggered the dispute, industry observers said.
In 2007, LPL paid around $97 million for the three firms — Mutual Service Corp., Associated Securities Corp. and Waterstone Financial Inc. — which at the time had a combined 2,200 reps and advisers generating $350 million in gross revenue.
Each of those three broker-dealers maintained its own clearing arrangements, at first with Pershing LLC and then using a combination of Pershing's platform and LPL's proprietary BranchNet.
That all changed in September, when LPL moved the three firms' remaining 1,700 reps and advisers off that hybrid platform and onto its self-clearing platform.
At least some of the claims that Pacific Life wants to have off its books involve former Associated Securities broker Jeffrey Forrest, who lost an $8.8 million arbitration claim this year.
The attorney for the plaintiffs in that case, Philip Aidikoff, said that over the summer, he filed two more claims totaling $10.5 million against Mr. Forrest, who has been barred from the securities business.
Other brokers from Pacific Life firms have been named in arbitration cases brought by investors claiming millions of dollars in losses. Attorney Kalju Nekvasil has represented 392 investors with claims totaling more than $20 million against Mutual Service Corp.
In August, Mr. Nekvasil wrote a letter to Richard Ketchum, chief executive of the Financial Industry Regulatory Authority Inc., expressing concern over the transfer of brokers and assets to LPL from Mutual Service. In the letter, he expressed concern that the transfer could leave Mutual Service with no assets and unable to meet any arbitration awards.
Mr. Nekvasil declined to comment about those arbitration claims.
By press time, Pacific Life spokesman Tennyson Oyler had not returned phone calls seeking comment.
An LPL spokesman, Joseph Kuo, said, “As a matter of policy, we have no comment beyond the disclosure in our” quarterly report. “We have a long-standing and productive relationship with Pacific Life.”
E-mail Bruce Kelly at bkelly@investmentnews.com.
