NASAA says ruling will have chilling effect on securities enforcement
The North American Securities Administrators Association Inc. has blasted a federal judge's decision to halt legal action brought by two states against Securities America Inc., charging that the ruling will have a chilling effect among state regulators and leave investors vulnerable to securities fraud and abuse.
NASAA leveled the charge in a legal brief it filed in a Dallas federal court yesterday. In it, the association objected to a temporary freeze of administrative actions brought by Massachusetts and Montana over the sale by Securities America of $400 million in private placements that went sour.
Federal Judge W. Royal Furgeson Jr. last month ordered a temporary halt to the states' actions, as well as three arbitration cases against Securities America, while he ruled on a proposal to combine all legal claims against the broker-dealer into a single class action.
Last year, Massachusetts and Montana sued Securities America over its sales of Medical Capital Holdings Inc. notes that are now in default. The Massachusetts administrative proceeding is close to concluding, while Montana's administrative action was to start in April.
In its brief, NASAA argues that “the request by the [class action] plaintiffs to enjoin the state regulators will not only terminate the efforts of the Massachusetts and Montana regulators, but it will have a chilling effect on all state securities regulators in that, despite their clear statutory authority to take steps necessary to police illicit conduct in their states, they potentially face having that authority impaired by defendants who would run to federal courts to plead poverty.”
NASAA also took aim at the class action lawyers in the case and Securities America's parent company, Ameriprise Financial Inc.
“This case reflects an instance wherein the prospect of gigantic fees has set the terms of the negotiations,” the brief claims. “Presumably to effectuate a speedy resolution to collect fees that would have otherwise been lost to other actions, plaintiffs' counsel has offered Securities America terms that allow Securities America to maintain the minimum net capital to be able to continue to operate after the settlement.”
The potential liability is also “certainly an amount that under even the most extreme circumstances would be less than the total assets of Ameriprise, a multibillion-dollar enterprise that is a named defendant” in the case, the NASAA brief claims.
Since Mr. Furgeson enjoined the arbitrations and state actions against the firm, dozens of individual plaintiffs and their attorneys who are suing Securities America in arbitration have filed briefs and memos arguing against the settlement. If the class action settlement goes forward as proposed, those former Securities America clients effectively will see their individual arbitration claims disappear. They will then become part of the class action.
At issue is the potential money the investors — and their lawyers — can collect. Investors who are part of the class action could get between 15 cents and 20 cents per dollar on the amounts they lost investing in Medical Capital Holdings and Provident Royalties LLC private placements. Investors suing in arbitration potentially could get 100 cents on the dollar or nothing — depending on the individual claim and the Finra arbitration panel.
Attorneys recently said that halting individual investors' right to sue a broker-dealer through arbitration would run counter to established legal precedent.
Mr. Furgeson is scheduled to hold a hearing on the closely watched case Friday. Speakers representing Securities America, the class action plaintiffs and the individual investors will argue before the court.
At the center of the dispute is the amount of money Securities America has on hand to pay investors. The firm has settled a handful of arbitration claims arising from the sale of the private placements by its brokers. At the end of December, the B-D lost a $1.2 million Financial Industry Regulatory Authority Inc. arbitration claim to an elderly investor who purchased Reg D offerings from the brokerage.
The class action plaintiffs, whose lead lawyer is Dan Girard, argue that stopping legal actions against Securities America was “necessary to protect Securities America limited funds from further depletion,” according to the NASAA brief.
As part of the potential settlement, Securities America has offered to create a $21 million pot of money for investors, with about half of that coming from future company revenue. In a separate proposed settlement, Ameriprise has agreed to set aside a $28 million pot of money for investors.
“The settlement with Securities America does not seek to limit the ability of the states to take regulatory actions against Securities America, and any suggestion to the contrary is inaccurate," said Mr. Girard, the class action attorney for the plaintiffs. "The States remain free to impose whatever regulatory penalties on Securities America and its principals and registered representatives that they deem appropriate. The problem is that the weight of the pending cases and arbitration proceedings will put Securities America out of business in a matter of months if not weeks," he said.
"The goal of the settlement is to maximize the recovery to investors and distribute that recovery equitably among all investors."
Calls to Securities America and Ameriprise were not immediately returned.
