Analysis: Ameriprise weighs Securities America support

NEW YORK Mon Mar 21, 2011 3:12pm EDT

NEW YORK (Reuters) - Ameriprise Financial Inc (AMP.N) has a tough decision on its hands: will it reach into its deep pockets and support its troubled Securities America brokerage, or stand back and let the subsidiary go under.

A federal judge dealt a setback to Ameriprise on Friday when he rejected a $21 million class-action settlement between Securities America and clients who lost $400 million on private placements by two companies later revealed to be frauds.

Securities America, which operates a network of about 1,800 independent brokers, warned that it does not have enough capital to pay all investor claims. Investors seeking damages through arbitration want Ameriprise to back its subsidiary.

But Ameriprise told its shareholders on Monday that financial support for Securities America may not come.

"Ameriprise Financial has no obligation to participate in Securities America's settlement discussions," the company said, adding it is in talks with Securities America to determine if it can find "a reasonable resolution for all constituents."

Ameriprise spokesman Ben Pratt declined to comment.

The company must weigh whether to lay out enough money to keep Securities America afloat or risk letting the business go under.

"As we work to help the parties come to a reasonable resolution, we will balance the best interests of all Ameriprise constituents," the company said.

Securities America provides trading, technology and other support services to its network of independent unbranded brokers, who generated $500 million in revenue last year. Ameriprise generated nearly $10 billion in net revenue in 2010.

Securities America held $2 million in actual capital at the end of December.

Securities America, based in La Vista, Nebraska, is the largest of the many broker-dealers that sold private placements by two companies, Medical Capital and Provident Royalties. The investments were wiped out in 2008-2009, and U.S. securities regulators later accused the companies of engaging in fraud.

Spokeswoman Janine Wertheim said Securities America is "committed to finding a solution to the Medical Capital and Provident Royalties matters for the company, its advisors and their clients."

She added her company seeks to know by the end of this week whether "a resolution is possible."

Earlier this month, Ameriprise reached a separate $27 million agreement with the same investors whose $21 million settlement was rejected on Friday.

Legal damages have been the undoing of several broker dealers in the past year. A firm called QA3 -- founded by the same businessman who launched Securities America in 1975 -- recently folded as a result of Medical Capital legal costs.

The Securities America matter pits the interests of investor arbitration claims against those of a class action, which argues it is better for all clients to receive some recovery. The alternative is that Securities America likely runs out of money, and claimants at the back of the line end up with nothing.

FINRA arbitrators in a private placement case late last year awarded $1.2 million in damages plus fees against Securities America. Dozens of additional arbitration cases are still pending against the brokerage.

(Editing by Steve Orlofsky and John Wallace)