Note 10 – Contingencies
The Company’s subsidiary, Sovereign, received a letter dated July 16, 2010 from a former client demanding that Sovereign compensate it for losses related to allegedly unsuitable investments in approximately $30 million of various auction rate securities purchased on its behalf by Sovereign. The former client has filed a claim against the underwriters for the purchased securities, but has not to this point brought a claim against Sovereign. Management is in the process of evaluating this demand and the former client’s allegations to determine whether there is any merit to them. In the interim, the Company has entered into a tolling agreement with the former client that extends to August 10, 2013. At this preliminary stage, the Company cannot fully determine the potential liability of the Company or the likelihood of an unfavorable outcome. In any event, management believes the claim would be covered by insurance (up to $20 million), subject to the payment of deductible amounts by the Company.
On October 25, 2011, a former client of Sovereign filed suit in the State of Illinois Circuit Court against Sovereign, alleging negligence and breach of fiduciary duty on the part of Sovereign in investing the former client’s assets in auction-rate securities. The claim alleges, among other things, that Sovereign failed to conduct adequate due diligence into the auction-rate securities purchased for the client’s account, and that the investment in the auction-rate securities was outside the former client’s investment guidelines. The suit seeks $4.7 million in damages, plus pre-judgment interest. Previously, the former client had made a similar claim under federal securities statutes and that federal claim was dismissed with prejudice on October 26, 2010. The Company filed a motion to dismiss the state claim but that motion was denied May 11, 2012. While management believes the state claim is without merit and intends to defend vigorously against this action, at this preliminary stage, it cannot fully determine the potential liability of the Company, the likelihood of an unfavorable outcome, or the potential cost of defense. In any event, management believes the state claim is covered by insurance, subject to the payment of deductible amounts by the Company.
The Company is from time to time involved in legal matters incidental to the conduct of its business and such matters can involve current and former employees and vendors. Management does not expect these matters would have a material effect on the Company’s consolidated financial position or results of operations.