Federal Judge Denies Preliminary Class Action Settlement, State Securities Regulators Give Sigh of Relief

On March 18, the Federal District Court for the Northern District of Texas, refused to a $21 million partial class action settlement with Securities America, a division of Ameriprise Financial.

The case stems from the sale of hundreds of millions of dollars of private placement notes in Medical Capital Holdings, which the SEC deemed to be a fraud in 2009. After the fraud was discovered, many investors filed arbitration claims against Securities of America, others joined together in multiple class actions, and others proceeded individually. The Massachusetts and Montana securities regulators also filed enforcement actions in 2010 against the defendants, which are now in the late-stages of litigation. On February 18, Senior District Judge W. Royal Furgeson, Jr. temporarily stayed several of the arbitration actions proceeding through FINRA while the motion was pending, but refused to halt the state enforcement actions.

The settlement was proposed by representative plaintiffs in three related class actions: Billitteri et al v. Securities America et al, Toomey et al v. Hofhines et al, and McCoy et al v. Cullum & Burks Securities Inc. et al. The representative plaintiffs’ motion sought approval of a 23(b)(1)(B) limited fund settlement with two of the defendant broker-dealers, Securities America, Inc. and Securities America Financial Corporation.

The proposed settlement would have affected all investors, regardless of how they decided to make their legal claim. If granted, the settlement also could have enjoined the state enforcement proceedings. According to the North American Securities Administrators Association, “enjoining state securities regulators [could] have a far-reaching impact by undermining investor protection not only in Massachusetts and Montana, but in other jurisdictions as well.” NASAA further stated that such an effect would make citizens “more vulnerable to fraud and abuse in the offer and sale of securities.” On March 14, NASAA filed a Brief in Opposition to Plaintiff’s Motion for Preliminary Approval of Partial Class Settlement, arguing how approval of the settlement would undercut state regulators’ enforcement ability. The organization was one of many that filed briefs and memoranda with the court regarding this motion.

In his Order, Judge Furgeson, notes the large number of outside parties interested in the outcome of the proposed settlement. He also makes specific mention of the enforcement actions proceeding in the two states, which likely weighed on his decision. However, Judge Furgeson’s order explaining the reasoning behind his decision has not yet been filed.