GunnAllen Financial Inc. is ready to file for bankruptcy protection, sources say. The move will leave hundreds of investors who have sued the broker-dealer to battle over what's left of the firm's assets, including its insurance policies.
However, the bankruptcy could actually slow down or perhaps kill lawsuits against the firm, industry observers said.
When a firm enters bankruptcy, it's as if a huge stop sign — called an “automatic stay” — is thrown in front of any other litigation, attorneys said. One lawyer representing GunnAllen told the Financial Industry Regulatory Authority Inc., which oversees arbitrations, that the bankruptcy could potentially halt investor's lawsuits against the company.
The filing puts investors' claims against GunnAllen into the federal bankruptcy proceeding, Ryan Baker, an attorney representing GunnAllen in arbitration claims, wrote in a letter to Finra.
“These bankruptcy matters will obviously impact how this arbitration proceeds, if at all,” Mr. Baker wrote. “Indeed, among other things, these matters raise questions concerning who can provide representation to GunnAllen,” he wrote.
“The company is filing [for bankruptcy] this week,” said William Schifino Sr., a shareholder of Williams Schifino Mangione & Steady PA. A longtime attorney to one of GunnAllen's founders, Richard Allen Frueh, Mr. Schifino referred questions about the bankruptcy's details to the attorney handling the matter, Harley Riedel, who did not return a call Friday seeking comment.
Finra shut down the broker-dealer last month after determining it could not meet its net-capital requirements. GunnAllen, which was one of the fastest-growing brokerage firms in the industry in the first half of the decade, was struggling under a number of legal problems and owes up to $50 million in liabilities from lawsuits filed by investors allegedly defrauded by brokers affiliated with the firm.
The legal costs crushed GunnAllen, which was spending $500,000 a month on lawyers, executives said.
The firm, which is set to file Chapter 11 bankruptcy protection, will be allowed to reorganize rather than liquidate. Consequently, the value of the brokerage's insurance policies could prove to be crucial to investors suing the firm, said Scott Silver, an attorney with Blum & Silver LLP, who represents about 100 investors with arbitration claims against the firm in the matter. “We are looking at the directors-and-officers policy,” Mr. Silver said.
Companies that intend to go out of business typically petition the courts for protection under Chapter 7 of the bankruptcy code.
Fred Kraus, who remained as GunnAllen's president after the firm was closed last month, did not return calls seeking comment.
John Sykes, GunnAllen's largest shareholder, said he had no prior knowledge of the firm's plans to declare bankruptcy. He resigned as the brokerage's chairman in November.
In a separate matter, the two founders of GunnAllen, Donald “Jay” Gunn and Mr. Frueh, have parted ways. The two teamed up to launch the firm in 1997, with Mr. Frueh serving as its chief executive and Mr. Gunn sticking mostly to investing, his clients and his book of business. When the firm went under last month, the two, along with a number of GunnAllen brokers, moved to J.P. Turner & Co. LLC.
While Mr. Frueh remains an adviser at J.P. Turner, Mr. Gunn is in the process of joining the private-client group of Anderson & Strudwick Inc. Mr. Frueh said he does not know why Mr. Gunn left.
Anderson & Strudwick previously had landed one of GunnAllen's biggest-producing groups of brokers, said Todd Newton, the firm's CEO. Led by Reggie Robinson, that office, which has 10 employee brokers who are not independent reps, has about $500 million in client assets and has generated $3.8 million in fees and commissions in the past 12 months.
E-mail Bruce Kelly at firstname.lastname@example.org.