Ameriprise, broker unit to pay $150M

Ameriprise Financial Inc., and its brokerage unit, Securities America Inc., have agreed to pay about $150 million to settle allegations that brokers misled clients by pitching investments that turned out to be frauds.

The large settlement, disclosed by attorneys Wednesday, allows Minneapolis-based Ameriprise to avoid a wave of consumer arbitration claims and lawsuits that could damage its credibility as an investment adviser.

For investors, the payout amounts to less than 40 cents on the dollar. Many elderly investors put retirement savings in two private companies on the advice of brokers at Securities America, based in La Vista, Neb. Now, some retirees will be forced to return to work or sell assets prematurely for a loss to maintain their standard of living, attorneys said.

"Is this a deal that will make my clients happy? No," said Donald McNeil, a securities arbitration attorney in Bloomington who represents nine investors in Minnesota who lost money in the private companies. "These are economic catastrophes for many [investors] that they will never make up in a lifetime."

The vast majority of investors who have filed claims against Securities America have already agreed to the terms, though many did so regretfully after more than a year of waiting for a resolution, attorneys said.

"We take this as a fair resolution of a pretty lousy situation," said Hugh Berkson, a Cleveland attorney who represents 54 households who lost money in the investments and was among a small group of attorneys involved in the final settlement negotiations.

Janine Wertheim, a spokeswoman for Securities America, declined to comment. An Ameriprise spokesman did not return telephone calls.

Investors alleged that brokers at Securities America sold promissory notes and preferred shares in two companies -- Medical Capital Holdings and Provident Royalties -- without fully informing them of the risks. The larger of the companies was Medical Capital, which used investor money to buy medical receivables debt. However, it was later found that the company was essentially a Ponzi scheme -- issuing new bonds to pay off investors.

Medical Capital ultimately defaulted on about $1.1 billion in obligations, including $358 million in notes sold by Securities America, according to a 2010 administrative complaint filed by the Massachusetts secretary of state.

Many people were attracted to the investments because Securities America brokers held them out as "secure" investments that would generate annual yields of 9 percent or more, regardless of how the economy performed. Elderly people, in particular, were drawn to the certainty of the interest payments, attorneys say.

However, the investment imploded in January 2009, after the U.S. Securities and Exchange Commission filed an emergency court action to halt a $77 million offering by Medical Capital. The SEC alleged that the firm and its principals defrauded investors by misappropriating $18.5 million in investor funds and by telling investors that no prior bond offerings had defaulted.

"When you pulled back the curtain, what was there was mostly junk," McNeil said.

The latest agreement was struck after two weeks of mediation meetings in Chicago.

The dollar amount of the settlement is unusually large in a securities fraud case. In many Ponzi schemes, investors get less than 10 cents on the dollar.

"It's a strong recovery, and it definitely shows that Ameriprise was concerned about trying these cases," said Thomas Jamison, a partner at Fruth, Jamison & Elsass, a Minneapolis law firm that does not represent any Securities America investors.

A court-appointed receiver in California has recovered an additional $125 million from Medical Capital primarily by selling the firm's assets. This cash also will be distributed to investors, separately from the settlement.