Legal fallout, competition dog NFP as it seeks to go private

Start-up Lion Street in position to poach NFP reps and advisers.

May 8, 2013 @ 2:21 pm

By Bruce Kelly

adviser, rep, National financial partners, nfp, sec, ponzi, lion street
+ Zoom

Just as it's preparing to go private with a sale to private-equity buyers, insurance broker and benefits roll-up firm National Financial Partners Corp. is facing hurdles created by its independent broker-dealer, NFP Advisor Services Group.

First is the potential costly legal fallout from NFP advisers' raising money for a $74 million mezzanine loan fund from about 450 investors during the real estate bubble. The Securities and Exchange Commission has alleged that it is a Ponzi scheme.

Next is a Texas startup, Lion Street Inc., which is well-positioned to poach NFP reps and advisers. In 1999, Bob Carter, Lion Street's chief executive, was one of the founders of National Financial Partners. He started Lion Street, an insurance agency with an eye on starting a broker-dealer and a registered investment adviser, in 2010. According to its website, Lion Street is “owned by fiercely independent advisers” and has more than 60 in its group.

Former NFP advisers and insurance agents have joined Mr. Carter's company. A video on the Lion Street's website features testimonials about Lion Street's adviser-oriented culture from four ex-NFP reps. And like NFP Advisor Services Group, Lion Street is based in Austin.

Last month, National Financial Partners and private-equity giant Madison Dearborn Partners LLC inked a deal for Madison Dearborn to take National Financial Partners private at $25.35 per share, for an equity value of about $1.3 billion.

It is not clear whether Madison Dearborn had an inkling of the potential threat of Lion Street or the legal fallout of NFP advisers' selling the Ponzi scheme, called True North Finance Corp.

The SEC sued True North and four of its executives in 2010 for alleged fraud in the offering. According to the SEC's complaint, the True North fund raised approximately $21.6 million between March 2008 and August 2009, which was the period of the alleged fraud.

It is also unclear which company will be on the hook for investor lawsuits stemming from NFP advisers' selling the True North scheme. While the SEC has not filed a complaint against NFP in the matter, some clients have turned to plaintiff's attorneys and filed arbitration claims again NFP with the Financial Industry Regulatory Authority Inc.

“NFP is responsible for doing due diligence” on the True North fund, said Jake Zamansky who in March filed a $1.2 million arbitration claim on behalf of a 78-year-old widow against NFP. “We allege they didn't do the due diligence,” said Mr. Zamansky, who added that his firm, Zamansky & Associates LLC, is also handling two other pending investors claims against NFP and is hearing from “numerous investors” over the firm's sale of the True North fund.

If the deal for National Financial Partners is completed, Madison Dearborn would have “successor liability” for such arbitration claims, Mr. Zamansky said.

In a November court filing, the SEC said NFP Securities “brought in a majority” of the investors in the True North fund. NFP suspended offering the fund to its customers in December 2008 pending the outcome of a third-party due-diligence review, according to the SEC. In February 2009, NFP ceased offering the fund to its customers, according to the SEC. Investors stopped receiving interest payments that November. The investors included nurses, retirees, teachers, multimillionaires and real estate developers, according to the SEC.

None of the companies involved wanted to speak about these developments. Representatives including Emily Deissler of NFP, Chuck Dohrenwend of Madison Dearborn and Jason Lahita of Lion Street all declined to comment.

NFP Advisor Services Group, which is registered with Finra as NFP Securities Inc., is one of the largest independent broker-dealers in the industry. In 2012, it generated $364.8 million in gross revenue and had 1,291 producing reps and advisers, according to the InvestmentNews list of top independent broker-dealers.

It's been an up-and-down ride for National Financial Partners and its advisers. NFP Advisor Services Group was one of the most aggressive buyers of financial advisory practices before the 2008 financial crisis, which derailed that effort. Advisers typically sold a percentage of their practices to National Financial Partners in return for company stock, which peaked above $54 per share in October 2007 and then fell to as low as $1.21 just 13 months later, before rebounding. Today, the shares trade around $25.

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