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Commitments and Contingencies
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9 Months Ended | ||
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Sep. 30, 2011
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| Commitments and Contingencies |
Litigation and Regulatory Matters
In
May 2003, a suit was filed in the U.S. District Court for the
Southern District of New York by Sedona Corporation against
Ladenburg, former employees of Ladenburg and a number of other
firms and individuals. The plaintiff alleged, among other things,
that certain defendants (other than Ladenburg) purchased
convertible securities from plaintiff and then allegedly
manipulated the market to obtain an increased number of shares from
the conversion of those securities. Ladenburg acted as placement
agent and not as principal in those transactions. Plaintiff’s
original complaint alleged that Ladenburg and the other defendants
violated federal securities laws and various state laws. In August
2005, Ladenburg’s motion to dismiss was granted in part and
denied in part. On May 27, 2009, the Court granted
in part and denied in part motions to dismiss the Second Amended
Complaint, and granted plaintiff leave to replead. On
July 9, 2009, plaintiff filed its Third Amended Complaint, which
contains no claims under the federal securities laws, leaving
only common law claims; the plaintiff seeks compensatory damages
from the defendants of at least $660,000 and punitive damages of
$400,000. On September 15, 2011, Ladenburg’s
motion to dismiss plaintiff’s Third Amended Complaint was
granted in part and denied in part. The Company believes
the claims are without merit and intends to vigorously defend
against them.
In
July 2004, a suit was filed in the U.S. District Court for the
Eastern District of Arkansas by Pet Quarters, Inc. against
Ladenburg, a former employee of Ladenburg and a number of other
firms and individuals. The plaintiff alleged, among other things,
that certain defendants (not Ladenburg) purchased convertible
securities from the plaintiff and then allegedly manipulated the
market to obtain an increased number of shares from the conversion
of those securities. Ladenburg acted as placement agent and not as
principal in those transactions. Plaintiff has alleged that
Ladenburg and the other defendants violated federal securities laws
and various state laws. The plaintiff seeks compensatory damages
from the defendants of at least $400,000. In April 2006,
Ladenburg’s motion to dismiss was granted in part and denied
in part. On July 23, 2010, the plaintiff dismissed its claims
against all defendants other than Ladenburg and the former
Ladenburg employee. In March 2011, the Court denied
Ladenburg’s motion for reconsideration of the motion to
dismiss as to the remaining claims. The Company believes
that the claims are without merit and intends to vigorously defend
against them.
In
July 2008, a suit was filed by BankAtlantic and BankAtlantic
Bancorp, Inc. against Ladenburg and a former Ladenburg research
analyst. The plaintiffs alleged, among other things, that research
reports issued by defendants were false and defamatory, and that
defendants were liable for defamation per se and negligence; the
amount of the alleged damages was unspecified. In February 2010,
the plaintiffs entered into a settlement agreement with Ladenburg
resolving all claims against Ladenburg. On July 1, 2010,
the plaintiffs and the former research analyst dismissed the
remaining claims with prejudice. In November 2010, the
former research analyst commenced an arbitration claim against
Ladenburg, the Company, and two Company directors for, among other
things, indemnification and breach of contract, seeking
reimbursement of expenses and other purported damages incurred in
defending the suit. On August 26, 2011, the arbitration
panel dismissed the claims against all respondents other than
Ladenburg. The Company believes the claims are without
merit and intends to vigorously defend against them.
In
January 2011, two former clients of Triad filed an arbitration
claim concerning their U.S Internal Revenue Code Section 1031
like-kind exchange investments made in 2006. The customers have
asserted claims for breach of contract, constructive fraud, breach
of fiduciary duty, unsuitability, and failure to supervise, and are
seeking approximately $1,800 in compensatory
damages. The Company believes the claims are without
merit and intends to vigorously defend against them.
In
January 2011, two former clients of Triad filed an arbitration
claim concerning variable annuities purchased in 2008. The
customers have asserted claims for breach of contract, fraud,
negligence, misrepresentation, breach of fiduciary duty,
unsuitability, negligent supervision, and violations of state
securities statutes, and they are seeking approximately $442 in
compensatory damages. The Company believes the claims
are without merit and intends to vigorously defend against
them.
Eight
arbitration claims have been filed against Triad in 2010 and 2011
by customers asserting that a former registered representative of
Triad sold them, not through Triad, guaranteed investments that
were fraudulent. The customers have asserted, among other claims,
claims for fraud, negligence, theft, conversion, §10(b)
violations, failure to supervise, respondeat superior, and breach
of fiduciary and other duties, and are seeking a total of $660 in
compensatory damages. The Company believes the claims are without
merit and intends to vigorously defend against them.
In
March 2011, a former client of Triad filed an arbitration claim
concerning unit investment trusts and other investments purchased
in the customer’s account. The customer has asserted claims
for negligence, breach of fiduciary duty, unsuitability, negligent
supervision, and violations of state securities statutes, and is
seeking an unspecified amount of compensatory
damages. The Company believes the claims are without
merit and intends to vigorously defend against them.
In
September 2011, a suit was filed in the U.S. District Court
for the District of Delaware by James Zazzali, as Trustee for the
DBSI Private Actions Trust, against fifty brokerage firms,
including Triad, and their purported parent
corporations. The plaintiff has alleged, among other
things, that the defendants failed to conduct adequate due
diligence and solicited investments in various securities by means
of materially untrue statements and the omission of material facts
in the private placement memoranda for those
securities. The complaint alleges violations of federal
securities laws and common law claims, and the plaintiff seeks an
unspecified amount of compensatory damages as well as other relief.
The Company believes the claims are without merit and intends to
vigorously defend against them.
During
the fourth quarter of 2009, one of the Company’s
broker-dealer subsidiaries had a short-term net-capital deficiency,
discovered during a routine regulatory review, which was not
disclosed properly on a monthly FOCUS report. The Company has
taken corrective actions, including reporting the deficiency to
governmental and self-regulatory organizations, filing amended
FOCUS reports for historical periods, reviewing net capital
compliance for historical periods, implementing new procedures to
monitor net capital compliance, and terminating the employees who
had primary responsibility for monitoring and reporting its net
capital. The Company is unable to determine whether and to
what extent any governmental and/or self-regulatory organizations
may seek to discipline the subsidiary concerning this matter.
Such disciplinary actions could include fines, a suspension of such
subsidiary’s operations and/or rescission of revenues
relating to the period of non-compliance, any of which could have a
material adverse effect on the subsidiary's results of operations
and financial condition.
In
the ordinary course of business, the Company’s subsidiaries
are defendants in litigation and arbitration proceedings and may be
subject to unasserted claims or arbitrations primarily in
connection with their activities as securities broker-dealers or as
a result of services provided in connection with securities
offerings. Such litigation and claims may involve substantial or
indeterminate amounts and are in varying stages of legal
proceedings. When the Company believes that it is probable that a
liability has been incurred and the amount of loss can be
reasonably estimated, the Company includes an estimate of such
amount in accounts payable and accrued liabilities.
Upon
final resolution, amounts payable may differ materially from
amounts accrued. The Company had accrued liabilities in the amount
of approximately $75 at September 30, 2011 and $286 at
December 31, 2010 for these matters. For other pending
matters, the Company is unable to estimate a range of possible
loss; however, in the opinion of management, after consultation
with counsel, the ultimate resolution of these matters should not
have a material adverse effect on the Company’s consolidated
financial position, results of operations or
liquidity.
Triad Contingent Consideration
On
August 13, 2008, the Company acquired Triad in a merger
transaction for an aggregate consideration of $6,826 in cash (net
of a post-closing adjustment of $674), 7,993,387 shares of the
Company’s common stock, valued at $10,427, and a $5,000
promissory note valued at $4,384. Under the Triad merger agreement,
if Triad achieved a cumulative profit target during the three-year
period following the merger, the Company would have been
required to pay to Triad’s former shareholders up to $7,500
in cash and issue to such shareholders up to 4,134,511 shares
of the Company’s common stock. Triad did not meet the
three-year cumulative profit target, and no contingent
consideration was due.
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