26. COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company leases office space in several cities under agreements that expire prior to 2018. Future minimum commitments under these operating leases are as follows:

FUTURE LEASE COMMITMENTS

(Dollars in Thousands)


	Lease		Less: Sublease			Net Commitment
2013	$	4,680	$	(2,182	)	$	2,498
2014		4,180		(2,152	)		2,028
2015		3,535		(2,108	)		1,427
2016		2,540		(2,053	)		487
2017		354		—			354
2018 and Thereafter		365		—			365

	$	15,654	$	(8,495	)	$	7,159

Rent expense for the years ended December 31, 2012, 2011, and 2010 was $2,537, $3,163, and $2,167, respectively, and was included in business development, occupancy, equipment expense in the consolidated statements of operations. Rent expense was recorded net of sublease income of $68, $1,220, and $1,032, for the year ended December 31, 2012, 2011, and 2010, respectively. The lease commitments noted above represent the actual cash commitments and will not necessarily match the amount of rent expense recorded in the consolidated statements of operations. See note 3-N.

Legal and Regulatory Proceedings

One of the Company’s U.S. broker-dealer subsidiaries, CCS, is a party to litigation commenced on January 12, 2009 in the United States District Court for the Northern District of Illinois (the “Illinois Court”) under the caption Frederick J. Grede, not individually, but as Liquidation Trustee and Representative of the Estate of Sentinel Management Group, Inc. v. Delores E. Rodriguez, Barry C. Mohr, Jr., Jacques de Saint Phalle, Keefe, Bruyette & Woods, Inc., and Cohen & Company Securities, LLC. Plaintiff, the Trustee for the Liquidation Trust (the “Liquidation Trustee”) for Sentinel Management Group, Inc. (“Sentinel”), and entity which sought bankruptcy relief in August 2007, alleged that CCS sold Sentinel securities, mainly CDOs that the Liquidation Trustee contended were unsuitable and that CCS violated Section 10(b) of the Exchange Act and Rule 10b-5. The Liquidation Trustee also sought relief under the Illinois Blue Sky Law, the Illinois Consumer Fraud Act, the United States Bankruptcy Code, and under common law theories of negligence and unjust enrichment. The relief sought by the Liquidation Trustee under these various theories included damages, rescission, disgorgement, and recovery of allegedly voidable transactions under the Bankruptcy Code, as well as costs and attorneys’ fees.

CCS is also party to litigation commenced on May 21, 2009 in the Illinois Court under the caption Frederick J. Grede, not individually, but as Liquidation Trustee of the Sentinel Liquidation Trust, Assignee of certain claims v. Keefe, Bruyette & Woods, Inc., Cohen & Company Securities, LLC., Delores E. Rodriguez, Barry C. Mohr, Jr., and Jacques de Saint Phalle. In this companion case to the above-described litigation, the Liquidation Trustee, purportedly as the assignee of claims of certain of Sentinel’s customers, alleged that CCS aided and abetted breaches of fiduciary duties purportedly owed by Sentinel and its head trader to Sentinel’s customers, in violation of Illinois common law, as well as claims under common law negligence and unjust enrichment theories. The relief sought by the Liquidation Trustee under these various theories included damages, disgorgement, costs, and attorneys’ fees.

During the second quarter of 2012, CCS and the Liquidation Trustee reached an agreement to settle both of the above actions, calling for CCS to make an initial payment of $3,000, and an additional payment of $2,250 in the future. In connection with the settlement agreement, the Company agreed to guarantee the second payment of $2,250. On December 27, 2012, the Illinois Court approved the settlement and entered an Order of Contribution Bar prohibiting future contribution claims against defendants, including CCS. This expense was accrued as a contingent liability in the statement of operations for the nine months ended September 30, 2012 as a component of non-operating income/(expense) along with the discounted then-present value of the future payment of $1,978. The future payment is due to be made on or before September 1, 2013, at which time the above-referenced cases will be finally dismissed with prejudice. The discount of $272 will be amortized as a component of interest expense over the period spanning the date of signing of the agreement through the final payment date. In January 2013, the initial payment of $3,000 was made.

The Company has been named in litigation commenced in the United States District Court for the Southern District of New York on June 29, 2012, under the caption U.S. Bank National Association v. Institutional Financial Markets, Inc. The plaintiff, U.S. Bank, alleges breach of contract respecting certain fees allegedly owing to U.S. Bank, as Trustee, in connection with the issuance of trust preferred securities, seeking damages and a declaration that the Company must make certain future fee payments. The Company filed a motion to dismiss the complaint in lieu of an answer on October 26, 2012. U.S. Bank filed its response to the motion on November 26, 2012. The court has not yet ruled on the motion. The Company intends to defend the action vigorously.

In addition to the matters set forth above, the Company is a party to various routine legal proceedings and regulatory inquiries arising out of the ordinary course of the Company’s business. Management believes that the results of these routine legal proceedings and regulatory matters will not have a material adverse effect on the Company’s financial condition, or on the Company’s operations and cash flows. However, the Company cannot estimate the legal fees and expenses to be incurred in connection with these routine matters and, therefore, is unable to determine whether these future legal fees and expenses will have a material impact on the Company’s operations and cash flows. It is the Company’s policy to expense legal and other fees as incurred.

Alesco XIV Guarantee

AFN invested in a CDO (Alesco XIV) in which Assured Guaranty (“Assured”) was providing credit support to the senior interests in securitizations. Alesco XIV made a loan (the “Guaranteed Loan”) to a particular borrower and AFN entered into an arrangement with Assured whereby AFN agreed to make payments to Assured upon the occurrence of both (i) a loss on the Guaranteed Loan; and (ii) a loss suffered by Assured on its overall credit support arrangement to Alesco XIV security holders. This arrangement is accounted for as a guarantee by the Company. At the Merger Date, the Company recorded a liability of $1,084 related to this arrangement, which is included in accounts payable and other liabilities in the Company’s consolidated balance sheet. This amount does not represent the expected loss; rather it represents the Company’s estimate of the fair value of its guarantee (i.e. the amount it would have to pay a third party to assume this obligation). This arrangement is being accounted for as a guarantee. The value will be adjusted under certain limited circumstances such as: (i) when the guarantee is extinguished; or (ii) if payment of amounts under the guarantee become probable and estimable. The maximum potential loss to the Company on this arrangement is $8,750. Under certain circumstances, Assured can require the Company to post liquid collateral.

Contribution to Alesco Preferred Funding X Legal Settlement

Alesco Preferred Funding X, Ltd. (“Alesco X”) is a CDO that was managed by Cohen & Company Financial Management, LLC (“CCFM”). Alesco X owned $4,000 of TruPS issued by Leawood Bancshares Statutory Trust I (the “Leawood TruPS”). Leawood Bancshares, Inc. (“Leawood”) and Alesco X entered into a letter agreement dated March 1, 2010 (the “Leawood/Alesco Agreement”) regarding the sale back to Leawood of the Leawood TruPS in exchange for $1,000 upon the occurrence of certain conditions related to the sale of Leawood to CrossFirst Holdings, LLC (“CrossFirst”). The proposed transaction contemplated by the Leawood/Alesco Agreement never closed as a result of the objections of investors in Alesco X, but the ultimate transaction between Leawood and CrossFirst did close.

On or about July 23, 2010, Leawood and CrossFirst Holdings, LLC filed a lawsuit against Alesco X in the United States District Court for the Southern District of New York, Civil Action No. 10-CV-5637 (JSR) alleging that there was a breach of the Leawood/Alesco Agreement. CCFM was not named in the lawsuit. ATP Management LLC, as purchaser of the management rights of Alesco X from CCFM, took over the defense of the action. In late October 2011, the Court issued a summary judgment decision against Alesco X and in favor of Leawood and CrossFirst. On or about December 6, 2011, the United States District Court for the Southern District of New York issued a judgment in favor of Leawood and against Alesco in the amount of $1,618 and in favor of CrossFirst and against Alesco X in the amount of $1,840. In exchange for a full release from Leawood, CrossFirst and Alesco X, the Company agreed to contribute $2,250 to Alesco X’s settlement of the judgment. This amount was included as a component of professional services and other operating expense in the consolidated statement of operations in the fourth quarter of 2011. The Company made the payment of $2,250 in April 2012.

Accumulated Dividends and Dividend Equivalents on Restricted Stock and Restricted Units

From time to time, the Company has granted restricted stock and restricted units that are entitled to receive dividends or dividend equivalents as and when such dividends or dividend equivalents are declared and paid by the Company; provided, however, that the cash dividends or dividend equivalents on such restricted stock or restricted units are held by the Company until the period of forfeiture lapses and forfeited if the underlying restricted shares or restricted units are forfeited. The Company’s potential liability, assuming the restricted stock or restricted units were to vest as of December 31, 2012, is approximately $119.