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A federal judge in Dallas has rejected a deal that would have allowed brokerage Securities America Inc. to pay $21 million to settle a class action lawsuit alleging that the company didn't do proper due diligence on millions of dollars in investments it sold that later proved worthless.
U.S. District Judge Royal Furgeson declined to approve the settlement, which had been worked out between the Nebraska-based company and plaintiffs' attorneys. The settlement would have paid investors who lost a combined $400 million only five cents on the dollar. Furgeson also refused to halt arbitration cases by investors who want to try to recoup their losses outside of the class action suit.
The investments in question were purchased through Securities America between 2003 and 2009. They involved shale gas ventures through Provident Royalties LLC and debt sales sponsored by Medical Capital Holdings Inc. Both entities have since been charged with fraud by the Securities and Exchange Commission.
"We've got a terrible situation here," Furgeson said during Friday's hearing. "You have $400 million in losses and the chance of that being recouped is zero. Something terrible happened here, and we're all trying to pick up the pieces."
Securities America, and its parent, Minneapolis-based financial planner Ameriprise Financial Inc., have said that Securities America could go out of business if the $21 million settlement wasn't approved and it had to face potentially larger losses.
"This settlement gives Securities America the greatest chance to survive," testified Kelly Windorski, chief financial officer of Securities America Financial Corp.
Daniel Girard, the lead plaintiff attorney in the class action, also told the judge during the day-long hearing that the settlement was the best result under the circumstances.
"What we're trying to do is create a little bit of magic to keep (Securities America) in business," he said.
But investors' attorneys argued that Securities America's parent, Ameriprise, is on solid financial footing and would always keep the unit capitalized. They also said that even if Securities America filed for bankruptcy protection it wouldn't necessarily mean that the company wouldn't be able to compensate investors at a rate higher than five cents on the dollar.
"The claim that this is all they can pay is gamesmanship, pure and simple, said Hugh Berkson, a Cleveland attorney who represents 54 households who lost $19 million in the alleged scams.
Beyond the company's financial condition, attorneys opposing the settlement argued that approving the settlements and stopping the arbitration cases would set a dangerous precedent by allowing Securities America to circumvent federal regulations. Securities cases are generally fought in arbitration. Regulators pursuing complaints against Securities America in Montana and Massachusetts also opposed approving the settlement. A representative of the North American Securities Administrators Association spoke on their behalf at the hearing.
"It's a good day for investors, and I hope Ameriprise steps up and fulfills the obligations of its subsidiary," said Joe Peiffer, a New Orleans attorney who represents 16 investors who lost money in the alleged scams and want to deal with it through arbitration.