Broker/Dealer Capital Financial Attempts to Circumvent the Arbitration Process and the Bankruptcy Laws


In the current economic environment where banks and large financial institutions have received financial bailouts, cash strapped broker dealer Capital Financial Services, Inc. is seeking to get a legal bailout. Despite rules of the Financial Industry Regulatory Authority to the contrary and established judicial precedent favoring arbitration, Capital Financial, an independent broker dealer that sold $65.3 million in high risk private placements, is attempting to combine 36 separate arbitration claims and lawsuits as part of a class action settlement. Merging all of the pending litigation, that involves Capital Financial’s sales of Provident Royalties’ private placement offering could potentially let Capital Financial off the hook for millions in damages and legal fees.

In the U.S. District Court of Texas last week, federal Judge W. Royal Furgeson, ordered that all arbitration claims and lawsuits against the independent broker dealer be halted until he can decide if they should have to become part of a single class action.
In August 2009, the Securities and Exchange Commission charged Provident Royalties with fraud for allegedly running a Ponzi scheme. Provident sold $485 million in securities with preferred stock or partnership interests priced at $5,000 and developed a wide network of independent broker-dealers to distribute the deals.
Capital Financial is facing 36 separate legal cases, according to court documents, from investors who bought almost $11.9 million in Provident Royalties private placements. The broker dealer, however, has few assets to pay the claims, according to court filings.

Judge Furgeson who froze legal action against Capital Financial, in the January 11 order wrote that “There is a limited fund available that is insufficient to satisfy the claims of investors who purchased Provident securities through Capital Financial.”
Capital Financial is among a handful of broker-dealers named in the class action. Other defendants include National Securities, Next Financial Group Inc. and QA3 Financial Corp.

General Counsel for National Holdings Corp., Mark Roth, a parent company of one of the broker dealers being sued, said they would be interested in a similar settlement, but that the plaintiffs would also have to agree to it. Already one individual investor who has filed an arbitration complaint with FINRA has objected to the settlement proposed.

Industry lawyers and executives of other broker-dealers being sued in the same class action will be listening in and paying close attention to Capital Financial’s pending motion.

J. Boyd Page, senior partner of Page Perry in Atlanta, noted that, in his opinion, “the motion should be denied. I think it is contrary to legal precedent and Capital Financial’s legal obligation as a member of the securities industry. If Capital Financial has insufficient funds to meet its obligations, it should either file for or be placed in bankruptcy where there are set rules and procedures to deal with such situations. These are not issues to be resolved in the class action context.”

Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 40 occasions, and have aided clients who have been the victims of financial adviser abuse and scams. Page Perry’s attorneys are actively involved in counseling institutional and individual investors regarding their investment problems. For further information, please contact us.