A flurry of law firms late Tuesday said that a class action had been started against clearer Penson Worldwide, over "materially false and misleading statements" about the Dallas firm's financial condition.
All the action centers in the U.S. District Court for the Northern District of Texas, where the law firms seek to recover damages on behalf of shareholders. The law firms making statements about class actions included Kaplan Fox & Kilsheimer in New York and San Francisco and Schneider Wallace Cottrell Brayton Konecky LLP, of Houston.
Making separate announcements about class action suits were the law offices of Howard G. Smith in Bensalem, Pennsylvania and Levi & Korsinsky in New York.
The Kaplan Fox complaint alleges that Penson:
Failed to disclose that by at least the end of 2010 1) the Company had approximately $96-97 million in receivables ("Nonaccrual Receivables") of which approximately $43 million were collateralized by illiquid securities and therefore unlikely to be collected; 2) the Company's assets (Nonaccrual Receivables) were materially overstated and should have been written down at least by the end of 2010; 3) as a result, the Company's reported income and EBITDA (earnings before interest, taxes, depreciation, amortization and stock-based compensation, and excluding certain nonoperating expenses) were materially overstated; and 4) the Company's financial statements were not prepared in accordance with generally accepted accounting principles ("GAAP").
It is further alleged that starting on May 9, 2011, Penson began to reveal the truth about its financial condition. On May 9, 2011, Penson disclosed it held Nonaccrual Receivables of approximately $97 million of which approximately $43 million were collateralized by illiquid securities issued by a troubled horse track and real estate project in Texas. Between May 9 and May 11, 2011, Penson shares declined from a close on May 9, 2011 of $5.45 per share to close at $3.93 per share on May 11, 2011, a decline of approximately 28%, on heavy volume.
Then, on May 12, 2011, the Complaint alleges that Penson disclosed the resignation of Company director Thomas R. Johnson, stating "[b]ased on Mr. Johnson's position as chief executive officer of Call Now, Inc, a holder of a portion of the Retama related collateral, both Mr. Johnson and the Company felt it appropriate for him to resign his position at this time." On May 12, 2011, Penson shares declined $0.81 per share further, or approximately 21%, to close at $3.12 per share, on heavy volume.
Finally, on August 4, 2011, it is alleged that after the close of trading, Penson disclosed that "the Company recorded a non-cash write down of $43.0 million, equal to $26.7 million or ($0.94) per share net of tax, against $96.6 million of nonaccrual receivables. The write down was recorded in conjunction with Penson's initiation of foreclosure proceedings on the majority of the collateral underlying these receivables, including, but not solely related to, certain assets associated with the Retama Development Corporation, and shares of Penson Worldwide stock."
Kaplan Fox said parties involved could seek to be designated a lead plaintiff within 60 days.
The Howard Smith firm said “no class has yet been certified.’’
Three weeks ago, Penson Worldwide said it planned a series of “strategic initiatives” to restore profitability, as its loss in the second quarter quadrupled from a year ago.
The company named a new president, in the process, and said it was already in talks to sell its Penson Financial Services Ltd. unit.
The Dallas company, a clearer of securities, said it planned to institute steps by year end that would reduce “internal costs” by $6 million. The company said it would handle any job cuts in the program, through attrition. Penson had 985 employees at the end of 2010.
Its net loss in the second quarter hit $30.2 million or $1.06 a share. Last year, the loss in its second quarter was $7.4 million or 29 cents a share.
The big charge: a non-cash write down of $43.0 million against $96.6 million of “nonaccrual” receivables. The write down came as Penson's started foreclosure proceedings on collateral underlying these receivables.
Net revenue was up, to $78.45 million from $71.11 million a year ago.
The company named Bryce Engel its president and chief operating officer, a new position. Mr. Engel, 39, joined the company in 2009, and had held the title of was executive vice president, international operations.
The company said its strategic initiatives are designed to:
• Generate an estimated $24 million of annual cost savings. These are in addition to $7 million to $10 million in savings forecast from the company’s services agreement with Broadridge Financial Solutions.
• Generate more than $100 million of regulatory capital through asset sales, improved utilization of existing capital and other initiatives. This includes capital expected to be released, when correspondent TD Ameritrade converts to self-clearing, now expected in the third quarter.
The cost savings and increased liquidity are intended to enable the Company to be profitable under current industry conditions, to strengthen the regulatory capital position of its operating subsidiaries and to pay down debt, the company said.
The savings are expected to start in the fourth quarter of 2011, and ramp up in the first half of next year.
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