March 30, 2011 / 1:36 PM / in 7 years

Ameriprise's Securities America near settlement; brokers chafe

* Lawyers reach preliminary pact over fraud claims

* Brokerage seeks survival support from Ameriprise

* Rivals make offers to worried brokers

By Joseph A. Giannone

NEW YORK, March 29 (Reuters) - Securities America, a broker-dealer owned by Ameriprise Financial (AMP.N) that’s battling litigation over fraudulent securities sales, has reached a preliminary settlement that ends threats to its survival, sources familiar with the negotiations said.

Wavering support for Securities America from Ameriprise throughout the proceedings still threatens to cause defections by some brokers and clients, said rival firms and recruiters.

Securities America and Ameriprise are offering plaintiffs in a wave of customer arbitration disputes as much as 48 percent of the value of their claims, according to a person familiar with the negotiations. That’s up from the 20 percent offer that a federal judge rejected two weeks ago in an attempt to settle a class-action suit by investors.

The agreement to settle arbitration claims that could have reached as high as $400 million was reached Friday after two days of mediation, the sources said. Lawyers are now polling plaintiffs and the more than two dozen attorneys who represent them to see if there is sufficient support, a process that may take a week.

Even if the agreement holds, Securities America is still vulnerable to outstanding class-action suits if they are not consolidated into the settlement, the source said.


Officials of Ameriprise and Securities America, which provides investment products and regulatory and business services to about 1,800 brokers who are ”independent contractors, declined to comment on the negotiations. Some plaintiffs’ lawyers have said previously that $200 million -- about half the damages claimed in various class-action suits and arbitration proceedings -- would satisfy the aggrieved investors.

Securities America brokers hawked about $700 million of notes from Medical Capital and also aggressively sold private securities of Provident Royalties. The companies were subsequently charged with fraud by the Securities and Exchange Commission, and about half of the investors who bought the securities between 2004 through the end of 2008 lost money.

Securities America was not the only independent brokerage firm in the sales network, but was the largest. The deep pockets of its parent made it more vulnerable than others to claims, according to lawyers.

The broker has warned that its $9.2 million of net capital could easily be wiped out by legal judgments and Ameriprise -- which has $2.9 billion of cash on its balance sheet -- has averred that it has no obligation to bail out the broker-dealer.

Ameriprise, a former financial planning and insurance unit of American Express Co. and the sixth-largest wealth management firm in the U.S., recently set aside $40 million in reserves for the Securities America litigation, far short of what clients are demanding.

The first of dozens of the pending cases resulted in a $1.2 million ruling against Securities America on New Year’s Eve. Another $21 million settlement was rejected on March 18 by a federal judge in Dallas, who wrote that the firm consciously decided “to maintain a very low capital structure” and maintain “a very low insurance coverage.”


As the legal battles continue and the fate of Securities America hangs in the balance, some recruiters say the firm’s brokers are highly vulnerable to raids.

Janine Wertheim, Securities Americas Advisors president, denies their assertions, saying brokers have been “overwhelmingly supportive” during the negotiations.

    “We’re not aware of any adviser leaving in the past couple of weeks as result of this situation,” she said. “Year-to-date, we have experienced a positive net gain in brokers.”

    Independent brokerages like Securities America allow their advisers to keep as must as 95 percent of the client revenue they generate as opposed to about 50 percent for the top producers employed at large brokerage firms. .

    In return, the advisers cover their own overhead, pay fees for access to trading and other systems, and generally have access to fewer financial products than colleagues at large Wall Street firms.

    Because they are used to the higher payouts and the lower bureaucracy, they are likely to listen to overtures from rivals independent firms such as LPL Financial (LPLA.O)--the biggest of the breed, Commonwealth Financial Network and Cambridge Financial Network. Those firms have apparently seized on Securities America’s customer suitability problems.


    Rival brokers say calls are coming their way without much inducement.

    “Our inbound calls have spiked,” said Robert Holcomb, marketing chief for First Allied Securities, an independent brokerage based in San Diego. “Plenty of their advisers are hopeful they can remain in place and a resolution will make all of this moot. Others (are) getting their lifeboats ready.”

    Timothy White, a recruiter at Kaye/Bassman International in Dallas, said that though Securities America brokers tend to be loyal no broker-dealer is invulnerable to defections when their advisers get hit with client suitability complaints.

    “You can be sure every broker-dealer is calling every broker at Securities America. They’re vulnerable,” said Arthur Grant, chief executive of Syracuse, New York-based independent brokerage Cadaret, Grant & Co.

    He said a few have joined his company, and talks are ongoing with “quite a few” more.

    Reporting by Joseph A. Giannone, editing by Jed Horowitz

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