Broker Demise Raises More Placement Concerns

(Dow Jones) The demise of yet another broker-dealer, QA3 Financial Corp., has made brokers more cautious than ever about putting private placements and other alternative investments in clients' portfolios.

Many investors had been clamoring for access to products like private placements, limited partnerships and non-traded real estate investment trusts. But damage claims arising from some allegedly fraudulent placements have forced a number of broker-dealers out of business over the past year and left others wary.

At the same time, stiffened regulation and shrunken portfolios have meant fewer investors who qualify, or have the means, to partake in those deals that are trusted.

QA3 Financial, based in Omaha, Neb., last Friday told its more than 400 brokers that it planned to close its doors Feb. 11, according to a published report. The firm reportedly faced bankruptcy over investors' damage claims related to sales of private placements that, according to regulators, turned out to be fraudulent. Those Regulation D investments included Medical Capital Holdings Inc. and Provident Royalties LLC.

Steve Wild, QA3's owner and chief executive, did not return calls seeking comment this week.

Brokers are concerned about selling private placements and similar products, said Dana Vietor, president of Workman Securities Corp., an Eden Prarie, Minn.-based broker-dealer with about 170 brokers. In an upcoming meeting set with reps, they've put a discussion of what's going on in the marketplace on the agenda, Vietor said.

"They're absolutely, 100% worried. I think that's universal. When a QA3 or a GunnAllen goes under, all brokers are worried," he said. GunnAllen Financial Inc. of Tampa, Fla., shut down last year, crippled by investor claims stemming from its sale of private placements including Provident Royalties.

Alternative investments now account for about 6% of Workman Securities' business, Vietor said.

"We have about 20% of the products that we had as little as six months ago on our platform to sell," said Vietor. "Of those 20%, we are continuing to do due diligence to make sure we even want to keep them. We're not getting new deals brought to us at all."

Workman Securites uses only Regulation D products, such as REITS and private placements, and doesn't use any private notes, Vietor said. It consolidated its platform to eliminate similar alternative investments and to use only the top sponsors, he said.

Brent Barton, senior vice president of alternative investments at WFG Investments Inc., a broker-dealer subsidiary of Dallas-based Williams Financial Group with about 260 representatives, said clients and broker-dealers are looking at alternative investments "much more closely."

WFG Investments and WFG Advisors have $6 billion in assets under management, and such investments account for less than 10% of its business, Barton said. The broker turns down many private placements either because it has similar products or because it doesn't like them, he said.

"We've had some people pound the table wanting something and we just say no," said Barton. That includes both clients and representatives.

"There's a lot of good product out there from some very qualified providers," he added, but determining the appropriate amount of due diligence is "a little like walking on sand; it's shifting all the time."

The company showed up on some lists with a small amount of Provident Royalties LLC because a broker bought some for his personal account and two clients invested in it before they came to the firm, Barton said. "We never signed a selling agreement with Provident. We didn't like their business model; we didn't have any insight that it wasn't well-run."

On Medical Capital Holdings, "we dodged a bullet," he said. "We didn't have any brokers ask us for it. We weren't even looking at it."

A crackdown by regulators on the private placement business is discouraging some firms from looking at unproven ventures, even if they offer legitimate opportunities. "Unfortunately, with the regulatory climate the way it is, we're going to have to deal with existing sponsors that have a proven track record, that can provide you with reputable product as opposed to going out and maybe taking on a start-up," Barton said.