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In a highly unusual legal maneuver, the trustee overseeing the receivership of private placements that went bust last year is suing 49 broker-dealers seeking to claw back $285 million in claims, including commissions, from the firms.
On June 21, the liquidating trustee, Milo H. Segner Jr., filed the lawsuit in federal bankruptcy court in Dallas against the broker-dealers, alleging they "failed miserably in upholding their fiduciary obligations" when selling the series of Provident Royalties LLC private placements.
The Securities and Exchange Commission last summer charged Provident and its leading executives with fraud in running a $485 million Ponzi scheme based on allegedly phony oil-and-gas investments. From June 2006 to January 2009, dozens of independent broker-dealers sold the Provident investments to some 7,700 investors. A court-appointed receiver was then put in charge of the Provident assets.
The trustee's lawsuit is on behalf of investors who bought $251 million of private placements and paid $34 million in commissions to the broker-dealers and their representatives.
"It is incredibly unique to see a receiver" take such an action, particularly as it involves dozens of third-party broker-dealers, said Scott Silver, a plaintiff's attorney who is suing broker-dealers on the behalf of individual investors who bought the Provident Royalties private placements.
The trustee is looking to take back the commissions that reps earned on the products.
"The commissions, fees and payments received from Provident Royalties encouraged and played a substantial role in the negligent and/or grossly negligent conduct of the broker-dealers," according to the lawsuit.
Included as exhibits in the suit are two lists — one of the broker-dealers that sold Provident Royalties and the amount of sales, and another of the total commissions generated. The leading sellers were Capital Financial Services Inc., with $33.7 million in sales, Next Financial Group, with $33.5 million, and QA3 Financial Corp., with $32.6 million.
QA3's general counsel, Greg Bolton, said the firm would "aggressively defend" itself from the trustee's complaint and would contest the trustee's standing to file such a lawsuit.
Gordon Dihle, an attorney for Capital Financial Services, said he could not comment because he had not yet seen the lawsuit.
Ami Shah, general counsel for Next Financial, declined to comment.
Broker-dealers that sold Provident Royalties private placements
Firm name Total sales Total commission paid to BD
Advisory Group Equity Services Ltd. $110,000 $70,650
AFA Financial Group LLC $2,455,000 $456,150
American Portfolios Financial Services Inc. $585,000 $66,650
Asset Management Strategies LLC $220,000 $2,250
Ausdal Financial Partners Inc. $100,000 $2,250
Barron Moore Inc. $250,000 $96,750
Boogie Investment Group Inc. $410,000 $110,150
Brookstone Securities Inc. $460,000 $76,500
Callaway Financial Services Inc. - $22,500
Calton & Associates Inc. $300,000 $40,750
Capital Financial Services Inc. $33,655,000 $5,510,725
CapWest Securities Inc. $21,745,000 $3,058,700
Chester Harris & Co. $340,000 $297,500
Community Bankers Securities LLC $2,780,000 $355,950
Crescent Securities Group - $9,375
David Harris & Co. Inc. $850,000 $94,000
DeWaay Financial Network LLC $850,000 $134,525
Eagle One Investments LLC $360,000 $42,500
Empire Financial Group Inc. $2,750,000 $234,200
Empire Securities Corp. $205,000 -
E-Planning.com Securities Inc. $3,765,000 $483,925
First Allied Securities Inc. $380,000 $11,250
Gk Securities LLC $50,000 -
Grant Bettingen Inc. $215,000 $19,350
GunnAllen Financial Inc. $22,255,000 -
Harrison Douglas Inc. $1,830,000 $569,900
Independent Financial Group $495,000 -
INVEST Financial Corp. $100,000 -
Investlinc Securities LLC $2,095,000 $183,275
Investors Capital Corp. $3,400,000 $427,975
J.P. Turner & Co. LLC $11,600,000 -
Jesup & Lamont Securities Corp. $100,000 $13,500
Kaiser & Co. $100,000 $160,650
Lighthouse Capital Corp. $250,000 $33,750
Main Street Securities LLC $205,000 $45,450
Matheson Securities LLC $100,000 $37,800
Milkie Ferguson Investments Inc. $4,145,000 $480,350
Morrow Wealth Management $30,000 -
National Securities Corp. $3,665,000 $437,250
Newbridge Securities Corp. $25,000 $15,750
NEXT Financial Group Inc. $33,485,000 $3,190,200
Okoboji Financial Services Inc, $21,910,000 $2,261,225
Private Asset Group Inc. $2,015,000 $204,150
Provident Asset Management $50,000 -
QA3 Financial Corp. $32,585,000 $6,974,450
Questar Capital Corp. $250,000 $24,125
Securian Financial Services Inc. $50,000 -
Securities America Inc. $17,995,000 $3,723,475
Securities Network LLC $215,000 $89,550
SII Investments Inc. $100,000 -
Sterling Enterprises Group Inc. $100,000 $13,000
Summit Brokerage Services Inc. $560,000 $81,000
Unaffiliated Broker-Dealer $150,000 -
United Equity Securities LLC $660,000 $173,200
United Securities Alliance Inc. $550,000 $401,850
Waterford Investor Services Inc. - $2,250
Wedbush Morgan Securities Inc. $325,000 -
WestPark Capital Inc. $785,000 $114,250
WFP Securities Corp. $6,755,000 $1,286,775
Williams Financial Group Inc. $175,000 -
Workman Securities Corp. $9,045,000 $1,239,025
Source: U.S. Bankruptcy court filings, Northern District of Texas, case # 09-33886
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