Securities America settlement hinges on buy-in

April 17, 2011
By Bruce Kelly
Investment News

A proposed $150 million settlement reached last week between Securities America Inc. and angry investors could be scuttled if enough of them decide to opt out of it.

Securities America and its parent company, Ameriprise Financial Inc., struck the deal with clients of the broker-dealer who bought $400 million of high-risk offerings that have since gone bust.

Apparently, however, the agreement was struck with little margin for discord.

According to attorneys instrumental in structuring the settlement, if a handful of clients — who collectively had $5 million in arbitration claims — decided to opt out of the agreement, the deal would blow up. And that, those attorneys said, could endanger the chances of Securities America's survival.

Essentially, Securities America and Ameriprise have put a hard cap on the settlement. If that cap is broken, the settlement dissolves, the attorneys said.

"We're too close for comfort," said plaintiff's attorney Joe Pfeiffer, a partner at Fishman Haygood Phelps Walmsey Willis & Swanson LLP, who ran a committee to create the settlement.

"We can't have a lot of [clients] opting out or filing new claims. It blows the settlement, and if the settlement blows up, I think it blows up Securities America," he said.

"The vast majority" of investors with arbitration claims have de-cided to take the settlement offer, according to another plaintiff's attorney who worked to create the settlement, Hugh Berkson, a partner at Hermann Cahn & Schneider.

Janine Wer-theim, a spokeswoman for Securities America, declined to comment.

Any agreement must be ap-proved by a federal judge in Dallas who has been overseeing the case. If the deal is approved and no glitches surface, investors should see money in their pockets by the end of this year, the attorneys said.

The proposed settlement is said to be worth about 37 cents on the dollar to investors. That's about three times the amount Securities America and Ameriprise Financial first put on the table last month.

From 2003 to 2009, about 400 of Securities America's 1,800 advisers sold private placements issued by Medical Capital Holdings Inc. and Provident Royalties LLC.

Dozens of independent broker-dealers sold those failed investment instruments, which the Securities and Exchange Commission has since claimed were fraudulent.

Securities America is facing two tracks of litigation. One involves investors who are suing as a class. Others have filed arbitration complaints against Securities America — and sometimes Ameriprise — with the Financial Industry Regulatory Authority Inc.

Lawyers said that the $5 million tipping point in breaking the deal also would apply to an influx of new arbitration claims worth that amount.

The settlement would also fail if class action litigants with $10 million in claims refused to accept the settlement. One attorney said his client, who purchased $550,000 of failed private placements notes from Securities America, would not agree to the settlement.

"We reject the settlement and opt out of the class action lawsuit," said independent attorney Mark Schwartz.

Why would plaintiffs reject the deal?

Ameriprise, the owner and controller of Securities America, earned more than $1 billion in 2010. The publicly traded company is setting aside a $40 million reserve for legal action stemming from Securities America.

"Ameriprise's legal status is something other than the tooth fairy here," Mr. Schwartz said. "Time and again, Ameriprise has put money into Securities America. Ameriprise claims it's separate, but it's clearly not."