As the stock market was climbing to its historical peak in late summer 2007, GunnAllen Financial Inc. executives told people that the firm was working to put the worst elements from its brief, intense past of breakneck growth behind it.
David Levine, then the firm's national sales manager, was touting an aggressive recruiting package dubbed “100% for Life.” He was also talking up the quality of financial advisers making inquiries about the firm.
It appeared that he had good reason to be so chipper. The independent broker-dealer peaked — along with the stock market — that year with $151 million in gross revenue.
At the same time, GunnAllen appeared to be getting a handle on its compliance problems.
Behind the scenes, company lawyers and executives were working with the Financial Industry Regulatory Authority Inc. to reach a wide-ranging settlement for the sins of the firm's incredible expansion, including supervisory issues and lax anti-money-laundering systems and record keeping.
Mr. Levine's upbeat, hopeful version of GunnAllen's future never came to pass.
LACK OF CAPITALLast Monday, Finra shut down the firm, stating that it lacked sufficient capital to conduct business.
The action left many wondering who — or what — killed GunnAllen.
No one answer emerged. GunnAllen brokers, top executives, industry recruiters and lawyers had a series of answers, focusing on ethically challenged brokers, investments that went bust and ill fortune.
In the end, GunnAllen appeared to be a firm that couldn't get out of its own way.
Was the killer one broker, Frank Bluestein? He, the Securities and Exchange Commission alleges, was responsible for soliciting about 800 investors who invested $74 million in an alleged Ponzi scheme that went bust in the summer of 2007, just as Mr. Levine was touting the firm's renaissance.
Last year, the SEC charged Mr. Bluestein with fraud, and he has more than 130 customer complaints on his employment record. The SEC's case against him is pending.
Perhaps, the real killer was the recent fallout that the firm suffered from selling $39.5 million in private placements in oil and gas offerings from Provident Asset Management, which Finra expelled from the securities business this month and the SEC charged with fraud last year.
Industry observers said that it could have been the culture of the firm. To that point, during its peak growth period, GunnAllen hired advisers with histories of compliance problems and had some who had multiple marks on their employment records.
In 2005, 4.5% of the firm's brokers were on heightened supervision by the compliance department because they had three or more knocks — or “yes” answers — on their U4s, the registration form for registered representatives.
By comparison, just 0.6% of reps registered in 2005 with NASD — Finra's predecessor organization — had three affirmative answers on their records. Former employees and industry observers will be left to decipher what caused the firm to fold.
What isn't open for debate, however, is that the firm's legacy is one of unfulfilled promise and insurmountable litigation.
GunnAllen executives and outside attorneys said that the firm could have between $35 million and $50 million in liabilities in client lawsuits stemming from brokers such as Mr. Bluestein and investments — namely Provident private placements — that have blown up. Legal costs crushed the firm, which was spending $500,000 a month on lawyers, executives said.
At its peak at the start of 2005, 970 reps and advisers were affiliated with the firm. About 400 were left to receive the news March 22 that the firm was shutting down.
In an effort to shake off its checkered past, the firm made significant strides by investing in compliance systems and hiring compliance personnel. GunnAllen executives, however, remained beholden, at times, to certain reps and branches with dubious ethics and business practices, said David Jarvis, the former general counsel.
“You cannot let the inmates run the asylum, and that's where the firm failed,” said Mr. Jarvis, whose comments echoed those of other GunnAllen executives, brokers and industry recruiters. “It let the inmates run the asylum.”
Donald “Jay” Gunn, the firm's co-founder, was aiming high, telling brokers that he envisioned the firm as what Merrill Lynch & Co. Inc. should be — a place where a broker can be left alone to do his or her business, said one GunnAllen rep, who asked not to be identified.
“I think a lot of brokers lied to his face about their background and intentions, and he believed them,” said the broker, who was deciding last Tuesday about which broker-dealer he would join.
“Jay wants to believe people. During that time, stories [were being] written about guys' being blackballed by broker-dealers,” the rep said.
Advisers with marks on their employment records turned to Mr. Gunn and co-founder Richard Allen Frueh, he said.
“Brokers probably said to Jay, "It's not my fault,'” the rep said.
Mr. Frueh and Mr. Gunn, producing brokers who are moving their registration to J.P. Turner & Co. LLC, both made their careers in the securities business as successful, transaction-oriented brokers.
The firm mirrored that type of business. It opened in 1997 and bulked up on brokers from 2002 to 2005, adding a whopping 750 in that time frame. At its peak, the firm had close to 1,000 brokers.
Many were transaction-oriented reps and some, as noted earlier, had besmirched employment histories.
During the first quarter of 2004, about 7% of the firm's gross revenue came from fees, with 88% coming from transactions. By contrast, the average independent broker-dealer generated about 20% of its gross revenue from fees.
In an interview last week, Mr. Frueh dismissed notions that the firm looked the other way in hiring brokers with bad track records, or that the legacy of early hiring did the firm in. GunnAllen “grew fast but added all kinds of compliance and supervision, and spent millions on that,” he said.
Instead, Mr. Frueh pointed to a variety of reasons for the firm's demise, including the historic market downturn and the change in the firm after it was sold in September 2008 to John Sykes.
At the time, the firm ceased recruiting, and brokers with $34 million in production eventually left.
“How do you make up that production?” Mr. Frueh asked.
What's more, Mr. Bluestein hornswoggled GunnAllen because he didn't tell the firm that he was selling private placements that have been called fraudulent by the SEC, Mr. Frueh said.
Mr. Frueh had remained with GunnAllen as a broker after Mr. Sykes bought the firm, and when the latter abruptly resigned as chairman in December, Mr. Frueh and Mr. Gunn informally reasserted their presence.
They are now trying to lure some brokers to follow them to J.P. Turner.
“Frank Bluestein was a 22-year veteran without a single mark on his license when we hired him,” Mr. Frueh said. He “had a beautiful book of business, and he was an incredibly good money manager,” running almost $1 billion in client money, he added.
“We didn't know anything about [the] Ed May [private placements], nor did two other broker-dealers” Mr. Bluestein worked with prior to GunnAllen, Mr. Frueh said.
In fact, someone at GunnAllen knew that Mr. Bluestein was selling the Ed May offerings, said David Foster, Mr. Bluestein's attorney.
Mr. Bluestein testified in an arbitration hearing last year that in 2005, just before he joined the firm, he told Dave McCoy, then a GunnAllen recruiting executive, that he was selling the deals.
Mr. Bluestein is unemployed, according to Mr. Foster.
“Did Frank kill GunnAllen?” Mr. Foster asked. “The seeds for GunnAllen's demise were planted when GunnAllen made an intentional decision to expand their company by hiring many registered reps with questionable records and then took the position of sales and profits regardless of costs.”
A deal with a potential buyer, Progressive Asset Management, was announced at the end of January, but the negotiations were never finalized or approved by regulators.
“At the core of GunnAllen were extremely dedicated employees that tried their best — each and every day — to create a firm where brokers wanted to be,” Mr. Levine said.
Meanwhile, the biggest-producing branch from GunnAllen is heading to independent broker-dealer, Aegis Capital Corp.
The New York branch is in the process of moving roughly 70 brokers to Aegis. Sources estimate the branch has as much as $500 million in assets.
E-mail Bruce Kelly at email@example.com.