Trustee petitions judge to issue subpoena to fund firm's National Financial Services unit; examining the money trail
The tentacles of litigation stemming from a series of oil and gas private placements that failed two years ago have now ensnared a giant in the clearing and custody business, National Financial Services LLC, a unit of Fidelity Investments.
Milo H. Segner, the trustee overseeing the liquidation of assets of Provident Royalties LLC, which the Securities and Exchange Commission charged with fraud in 2009, last month requested that a federal judge in Dallas issue a subpoena to National Financial.
In the court filing, Mr. Segner wants access to retirement account documents of clients of four broker-dealers that sold preferred stock of Provident and used National Financial as a clearing firm.
Dozens of broker-dealers sold the Provident offerings from September 2006 to January 2009, raising $485 million. Regarding National Financial records, Mr. Segner wants documents of 579 clients who bought $39.1 million of Provident from four firms: J.P. Turner & Co. LLC, Milkie/Ferguson Investments Inc., National Securities Corp. and Securities America Inc.
A spokesman for National Financial, Steve Austin, said the firm typically does not comment on matters involving its correspondent clearing, broker-dealer clients.
Clearing firms do not sell securities but rather hold them for broker-dealers and their clients.
Calling Provident a “massive Ponzi scheme,” Mr. Segner claimed that the “trustee is entitled to information concerning the relationship between the broker-dealers and their respective clearing houses, and how those funds were transferred, paid for and accounted for by the clearing houses,” the court filing stated.
“As custodial fiduciary, [National Financial] should have agreements with the various broker-dealers they did business with and records for every dollar that went through their controlled account,” according to the filing.
In a separate matter, Mr. Segner is suing a due-diligence analyst who assessed the series of Provident offerings, seeking to claw back about $430,000 in fees Provident paid to the analyst, Mick & Associates PC LLO.
In a common business practice that has drawn the scrutiny of securities regulators, product sponsors of private placements, not the broker-dealers, commonly pay an outside, third-party due-diligence firm for a report assessing the deal. In turn, product sponsors also pay broker-dealers a 1% “due diligence” fee when selling the deal.
“Mick's grossly negligent actions, failure to detect and/or ignorance of the Provident Ponzi scheme, and failure to adhere to fiduciary standards vitiate any good faith on its part,” according to the complaint.
Calling the trustee's legal reasoning “specious,” the firm said it will vigorously defend itself.
Mr. Segner last year sued dozens of broker-dealers to claw back revenue and commissions from the sale of Provident.
Michael Rochelle, a lawyer for Mr. Segner, did not return a call this morning seeking comment.
