A U.S. judge rejected a preliminary class-action settlement with Securities America, a broker accused of failing to vet fraudulent companies properly, in a ruling that gave a lift to state regulators trying to stop the deal.
After hearing a full day of argument in a Dallas federal court, Senior U.S. District Judge Royal Furgeson said on Friday that he would not approve the settlement with the unit of Ameriprise Financial Inc
A representative for Securities America did not immediately respond to a request for comment.
Tomko's clients -- Massachusetts, Montana and the North American Securities Administrators Association (NASAA) -- had argued that the private investor settlement and a proposed injunction would have stopped the states from pursuing their own claims and created a chilling effect.
State securities regulators have investigated allegations of wrongdoing by Securities America related to its sales of private placements issued by two companies, Provident Royalties and Medical Capital Holdings.
The U.S. Securities and Exchange Commission filed fraud charges against the two companies in July 2009. Last year Massachusetts charged Securities America with improper sales of Medical Capital notes, while Montana filed a cease-and-desist order.
A flood of investors filed arbitration claims against Securities America, arguing the brokers failed to conduct proper due diligence before marketing the private placements.
Other investors recently reached a settlement agreement with Securities America to create a $21 million fund, which was the subject of Friday's hearing in Dallas.
The settling investors had argued that Securities America does not have the capital to pay the more than $300 million claimed by investors seeking damages through arbitration.
We're disappointed, but we understand and respect the judge's decision, said Daniel Girard, an attorney for the investors who attempted to settle.
Joseph Peiffer, who represents arbitration investors opposed to the settlement, called Furgeson's decision a good thing.
Hopefully Ameriprise will step up and support its subsidiary, Peiffer said.
Furgeson indicated that a revised deal with an opt out clause might be approved, though the judge did not know if that was something that could be worked out, Tomko said.
The judge said he would issue a short formal order on Monday, Tomko said.
The case in U.S. District Court, Northern District of Texas is Billitteri v. Securities America Inc. et al, 09-1568.
(Reporting by Dan Levine and Joseph Giannone; Editing by Richard Chang)