Securities America: Boiler room on prairie

Near the end of Ameriprise Financial's annual shareholder meeting in downtown Minneapolis on Wednesday, an investor asked why, after 13 years, the company had decided to sell its brokerage unit, Securities America.

CEO James Cracchiolo rambled for a bit about synergies, value propositions, strategic direction and core businesses before quickly bringing the meeting to a close.

He just as easily could have said this: "Securities America has been a stain on the Ameriprise brand. Keeping it would threaten to undermine the trust and credibility our advisers have worked so diligently to build."

And then he could have apologized for not unloading the Omaha-based firm sooner.

The decision to seek a buyer for Securities America, announced Monday, came just five days after Ameriprise said it would cough up $150 million to settle claims that Securities America stuck clients with at least $400 million in worthless private placements in two bankrupt companies, Medical Capital and Provident Shale.

A complaint filed by the state of Massachusetts alleged that Securities America kept selling the private placements even after a top executive expressed concern about the lack of audited financial statements at Medical Capital.

Regulators said Medical Capital was essentially a Ponzi scheme. Early investors were repaid with funds from subsequent investors, though some of the funds went to pay for an Internet pornography firm.

A Securities America spokeswoman said the company was grateful that Ameriprise was providing the money to settle the claims, and that the settlement was not an admission of wrongdoing. "We continue to believe the company, our advisors and their clients were victims of the alleged fraud perpetrated by Medical Capital and Provident," she said.

The latest complaints against Securities America have been winding through the courts and arbitration panels for two years, but they are not the first roundhouse blow, by way of Omaha, to Ameriprise's credibility. In 2003, an arbitration panel awarded $5.4 million to two Florida customers who were duped by a Securities America broker using a false identity. The arbitration panel faulted Securities America for its "appalling" treatment of customers, and for intentionally withholding crucial information from its customers.

Since 2005, arbitration panels have ordered Securities America to pay almost $27 million to clients for a variety of fraudulent or negligent activities on the part of its brokers. In one case a broker persuaded 32 Exxon employees to retire early, cash out their company-sponsored investment plans and invest through him.

That $27 million does not include cases that were settled outside of arbitration. Nor does it include all the fines levied by regulators. Those have been frequent, too. Last month, for example, Indiana fined Securities America $10,000 for sharing customer information with an unauthorized third party, and for placing an order without the customer's permission.

Last year, Securities America paid $25,000 to settle a complaint that it failed to provide proper training or guidance to its trading department. In 2007, Securities America paid a $375,000 fine to settle charges that it improperly directed commissions to one broker. And in 2005, Securities America was fined $2.4 million in a case relating to preferential treatment of certain mutual funds.

The cost of owning Securities America? Think of it this way: The latest settlement alone works out to $2.5 million a month for each of the past five years. But even that doesn't begin to account for the damage to Ameriprise's reputation.