Finra taking a hard look at GunnAllen's books

Regulator will determine if the company has enough capital to operate, following the departure of its holding firm's chairman, John Sykes

Dec 13, 2009 @ 12:01 am

By Bruce Kelly

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Finra officials last week were trying to determine if GunnAllen Financial Inc., already reeling from the abrupt departure of its holding company's chairman, has enough capital to stay in business. Inquiries into a firm's net capital are among the most serious in the securities business. If the Financial Industry Regulatory Authority Inc. discovers that a broker-dealer is without sufficient net capital, it will shut down that firm almost immediately. GunnAllen and its 726 registered representatives and financial advisers have weathered a storm of uncertainty this month. On Dec. 2, GunnAllen Holdings Inc. chairman John Sykes suddenly resigned, as did other board members, including the chief financial officer. On Dec. 8, Finra officials arrived at the Tampa, Fla., headquarters of GunnAllen Financial to determine the firm's capital position, and they remained there through at least last Thursday, according to sources inside and outside the company. GunnAllen doesn't disclose its assets under management, but based on the number of advisers, industry experts said that regulators would want the firm to have a minimum of between $100,000 and $250,000 in net capital on reserve to stay open for business. However, net-capital calculations take into consideration much more information — including the firm's overhead and potential liabilities — than just overall size.

<b>John Sykes:</b> Resigned suddenly, as did other board members.
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John Sykes: Resigned suddenly, as did other board members.

Because GunnAllen faces potentially millions of dollars in liabilities from legal issues, the money it needs to meet its net-capital requirement could be much greater.

Earlier this decade, the firm's broker-dealer was one of the fastest-growing independent-contractor firms in the nation. But the growth came with a high price, as the firm recruited a sizable number of brokers with a history of compliance problems.

As a result, GunnAllen continues to struggle with lawsuits and litigation, including allegations against broker Frank Bluestein, who was charged in a Securities and Exchange Commission complaint with selling investments in an alleged $250 million Ponzi scheme.

The firm was also one of the independent broker-dealers that sold securities of Provident Royalties LLC, which the SEC this summer charged with fraud related to a series of oil and gas deals. Investors have begun to sue firms and advisers over the Provident investments.

After the resignation of Mr. Sykes, a Florida entrepreneur who bought GunnAllen in November 2008, the firm became the target of intense speculation in the brokerage industry. According to sources, the firm's brokers and advisers are being bombarded with calls from recruiters.

One GunnAllen executive said that he doesn't know the outcome or result of the Finra inquiry. Finra spokesman Herb Perone said the regulator would not comment about GunnAllen.

“When there's material news about a firm, it's very standard for Finra to check. It's consistent with their role to protect investors,” said David Levine, an executive vice president with GunnAllen Financial.

“We're working on options and will have updates in the near future,” he said.

In the middle of such turmoil, Fred Kraus, GunnAllen's president, is trying to keep brokers and advisers calm and focused on the future of the firm.

In a conference call last Wednesday, he told advisers that the firm is looking at solutions, including various options on financing, said one adviser, who listened to the call and asked not to be identified.

“There was not a lot of information,” the adviser said. “Maybe we get really lucky and there's a new marriage.”

As of the most recent InvestmentNews survey, GunnAllen Financial had 726 affiliated reps, with 285 of those producing more than $100,000 in fees and commissions.

E-mail Bruce Kelly at bkelly@investmentnews.com.

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