NEW YORK (Reuters) - Ameriprise Financial Inc AMP.N is reluctant to bail out an independent brokerage unit flooded by legal claims and is prepared to let the business go under, according to a source familiar with the company's thinking on the matter.
Lawyers for investors who claim $400 million of losses on securities bought through the brokerage unit, Securities America, last week helped persuade a federal judge in Dallas to reject a $21 million class-action settlement with the unit.
Lawyers for the investors, Ameriprise and Securities America started mediation before a retired federal judge in Chicago on Thursday.
Securities America says it does not have enough money to pay all the potential damages, but plaintiffs’ lawyers are betting deep-pocketed Ameriprise will ultimately make its unit’s customers whole and keep a firm with 1,800 independent brokers afloat.
But the source familiar with Ameriprise’s thinking told Reuters the company, while eager to see Securities America survive, is also concerned about protecting its shareholders.
“Ameriprise is willing to walk away,” said the source, who was not authorized to speak publicly about a matter still in litigation. “It is a public company with shareholders, and Ameriprise has to look out for their interests.”
Ameriprise declined to comment, but the company earlier this week insisted it had no obligation to get involved in the Securities America settlement talks.
On Monday, Ameriprise told shareholders that “as we work to help the parties come to a reasonable resolution, we will balance the best interests of all Ameriprise constituents.”
The showdown in Chicago is the latest chapter in a story that began with two companies that issued private placements, Provident Royalties LLC and Medical Capital Holdings Inc. The securities later plunged in value.
The Securities and Exchange Commission in July 2009 accused the two companies of defrauding investors. While many brokerages distributed the securities, and many small firms have since been forced to close their doors, Securities America was by far the largest.
The La Vista, Nebraska, broker dealer provides technology and other support for 1,800 self-employed brokers who do not use the Ameriprise name. Minneapolis-based Ameriprise is a financial planning giant and one of the country’s largest wealth managers with about 10,000 advisers doing business under the Ameriprise brand.
Because it clears trades through Pershing LLC and Fidelity, Securities America is allowed by regulators to operate with a thin capital cushion. That lack of capital looms large as investors trying to recover private placement losses turn to Securities America.
On New Year’s Eve, arbitrators ordered the firm to pay $1.2 million in compensatory and punitive damages, plus fees, related to its sale of the private placements.
Earlier this year a class of investors struck a $21 million settlement with Securities America and a $28 million agreement with Ameriprise. The view was that it was better for all investors to receive 20 cents on the dollar than drive the brokerage into bankruptcy and leave some clients with nothing.
Many plaintiffs lawyers argued they could realize higher recoveries in arbitration, though they are counting on Ameriprise and its $2.9 billion of cash to rescue the unit. These attorneys also believe Ameriprise would not risk damaging its own reputation by letting a subsidiary go bankrupt.
Friday’s court ruling, as a result, increases the brokerage’s potential legal exposure and opens the possibility that Securities America could be overwhelmed by damages.
Timothy Hurley, an investment banker hired by plaintiffs as an expert, last week submitted a report to the court concluding that Ameriprise has the means and has in the past found ways to bail out its subsidiary businesses.
Securities America’s $90 million of stockholder equity, rather than its net assets, should be considered when assessing its ability to pay, he said. Hurley estimates Ameriprise could pay $110 million in this matter.
Securities America “is an integral and significant part of Ameriprise,” he wrote, adding that the company previously has bailed out or offered support to a hard-hit fund or unit.
“This history of providing support should dispel the notion that the operating subsidiaries are truly independent entities with limited financial resources,” Hurley wrote.
Reporting by Joseph A. Giannone; editing by John Wallace and Matthew Lewis
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