Annual report pursuant to section 13 and 15(d)

Securities Owned and Securities Sold, But Not Yet Purchased

v2.4.0.8
Securities Owned and Securities Sold, But Not Yet Purchased
 12 Months Ended
Dec. 31, 2013
Securities Owned and Sold, Not yet Purchased [Abstract]  
Securities Owned and Securities Sold, But Not Yet Purchased
Securities Owned and Securities Sold, But Not Yet Purchased
The components of securities owned and securities sold, but not yet purchased as of December 31, 2013 and 2012 were as follows:
 
 
Securities Owned   
 
Securities Sold,
But Not Yet Purchased
December 31, 2013
 
 
 
 
Certificates of deposit
 
$
24

 
$
—

Debt securities
 
1,402

 
(46
)
U.S. Treasury notes
 
1

 
—

Common stock and warrants
 
689

 
(33
)
Restricted common stock and warrants
 
725

 
(4
)
Other investments
 
1,948

 
—

Total
 
$
4,789

 
$
(83
)
 
 
 
 
 
December 31, 2012
 
 
 
 
Certificates of deposit
 
$
14

 
$
—

Debt securities
 
1,098

 
(123
)
U.S. Treasury notes
 
—

 
(99
)
Common stock and warrants
 
384

 
(70
)
Restricted common stock and warrants
 
582

 
—

Total
 
$
2,078

 
$
(292
)


As of December 31, 2013 and December 31, 2012, approximately $4,014 and $1,787, respectively, of securities owned were deposited with clearing brokers and may be sold or hypothecated by the clearing brokers pursuant to clearing agreements with such clearing brokers. Securities sold, but not yet purchased, at fair value represents obligations of the Company’s subsidiaries to purchase the specified financial instrument at the then current market price. Accordingly, these transactions result in off-balance-sheet risk as the Company’s subsidiaries’ ultimate obligation to repurchase such securities may exceed the amount recognized in the consolidated statements of financial condition.
    
    



Authoritative accounting guidance defines fair value, establishes a framework for measuring fair value, and establishes a fair value hierarchy which prioritizes the inputs to valuation techniques. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market. Valuation techniques that are consistent with the market, income or cost approach are used to measure fair value.
The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
• Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities.

• Level 2 — Inputs other than quoted market prices that are observable, either directly or indirectly, and
reasonably available. Observable inputs reflect the assumptions market participants would use in pricing the
asset or liability and are developed based on market data obtained from sources independent of the Company.

• Level 3 — Unobservable inputs which reflect the assumptions that the Company develops based on available
information about what market participants would use in valuing the asset or liability.

Securities are carried at fair value and classified as follows:
 
 
December 31, 2013
Securities owned, at fair value
 
   Level 1
 
   Level 2
 
   Level 3
 
   Total
Certificates of deposit
 
$
24

 
$
—

 
$
—

 
$
24

Debt securities
 
—

 
1,402

 
—

 
1,402

U.S. Treasury notes
 
—

 
1

 
—

 
1

Common stock and warrants
 
689

 
725

 
—

 
1,414

Other investments
 
—

 
1,948

 
—

 
1,948

Total
 
$
713

 
$
4,076

 
$
—

 
$
4,789


 
 
December 31, 2013
Securities sold, but not yet purchased, at fair value
 
   Level 1
 
   Level 2
 
   Level 3
 
   Total
Debt securities
 
$
—

 
$
(46
)
 
$
—

 
$
(46
)
Common stock and warrants
 
(33
)
 
(4
)
 
—

 
(37
)
Total
 
$
(33
)
 
$
(50
)
 
$
—

 
$
(83
)

 
 
December 31, 2012
Securities owned, at fair value
 
   Level 1
 
   Level 2
 
   Level 3
 
   Total
Certificates of deposit
 
$
14

 
$
—

 
$
—

 
$
14

Debt securities
 
—

 
1,098

 
—

 
1,098

Common stock and warrants
 
384

 
582

 
—

 
966

Total
 
$
398

 
$
1,680

 
$
—

 
$
2,078


 
 
December 31, 2012
Securities sold, but not yet purchased, at fair value
 
   Level 1
 
   Level 2
 
   Level 3
 
   Total
Debt securities
 
$
—

 
$
(123
)
 
$
—

 
$
(123
)
U.S. Treasury notes
 
—

 
(99
)
 
—

 
(99
)
Common stock and warrants
 
(70
)
 
—

 
—

 
(70
)
Total
 
$
(70
)
 
$
(222
)
 
$
—

 
$
(292
)

    
Debt securities and U.S. Treasury notes are valued based on recently executed transactions, market price quotations, and pricing models that factor in, as applicable, interest rates and bond default risk spreads.
Warrants are carried at a discount to fair value as determined by using the Black-Scholes option pricing model due to illiquidity. This model takes into account the underlying securities current market values, the underlying securities market volatility, the terms of the warrants, exercise prices, and risk-free return rate. As of December 31, 2013 and December 31, 2012, the fair values of the warrants were $534 and $160, respectively, and are included in common stock and warrants (level 2) above.
From time to time, Ladenburg receives common stock as compensation for investment banking services. These securities are restricted under applicable securities laws and may be freely traded only upon the effectiveness of a registration statement covering them or upon the satisfaction of the requirements of Rule 144, including the requisite holding period. Restricted common stock is classified as Level 2 securities.
Other investments consist principally of equity interests in Real Estate Investment Trusts, which are valued based on broker-dealer quotations and pricing available from buyers in the secondary market (see Note 13 - Litigation and Regulatory Matters).