On Advice

Independent broker-dealer Triad Advisors sues former advisers

Firm takes action against former advisers for allegedly violating terms of promissory note

May 7, 2017 @ 6:00 am

By Bruce Kelly

In a highly unusual move by an independent broker-dealer, Triad Advisors Inc. is suing a group of former advisers who left the firm to start their own broker-dealer.

Last October, Triad sued the advisers, David Millican, Jeffrey Shaver and Joseph Young, as well as their firm, Atlanta Capital Group, in Georgia state court. Atlanta Capital is now called ACG Wealth and has close to $1.4 billion in assets, according to its Form ADV filed with the Securities and Exchange Commission. The three ex-Triad advisers also have started their own broker-dealer, Arkadios Capital.

(More: Top independent broker-dealers by revenue and payout)

PROMISSORY NOTE

Triad, a subsidiary broker-dealer of Ladenburg Thalmann Financial Services Inc. since 2008, alleged that the three brokers violated terms of a promissory note from 2012 that stipulated they had to stay at Triad for a five-year period after the loan was repaid, according to the lawsuit. The 2012 promissory note, the proceeds of which were used by Atlanta Capital to acquire other firms, was repaid in May 2016. Mr. Millican left Triad last August, and Mr. Shaver and Mr. Young left the firm over the winter. In addition to filing a lawsuit, Triad filed for a temporary restraining order against the advisers, which was denied.

"As a direct result of the defendants' intentional wrongful conduct, Triad has suffered irreparable harm and will continue to suffer such harm in the form of actual and threatened solicitations of registered representatives associated with Triad, misappropriation of Triad's investments used to grow the defendants' business, loss of business opportunities, damage to and loss of relationships with registered representatives and loss of market share," according to Triad's complaint.

The defendants have filed an arbitration claim against Triad with the Financial Industry Regulatory Authority Inc.

"Until recently, Triad and Atlanta Capital enjoyed a successful and mutually beneficial relationship," according to the arbitration claim. "As Triad tells it, Atlanta Capital covertly formed its own broker-dealer entity, ended its relationship with Triad, and disregarded a binding restrictive covenant requiring Atlanta Capital to remain with Triad for five more years. This, quite simply, is not true."

In the arbitration claim, Atlanta Capital asserts that the chief executive of Triad at the time reassured Mr. Millican that the firm would "never enforce" the restrictive covenant.

Independent firms, called that because they pay their reps as independent contractors, not employees, are loath to sue advisers when they depart for what they hope to be greener pastures because IBDs preach that an adviser's business is his or hers alone. Touting independence is a key element of marketing for an IBD. The message is, the broker-dealer simply exists to facilitate the adviser's work, taking a 10% to 20% slice of the adviser's revenue in return.​

Wirehouse advisers, on the other hand, are employees. Historically, the wirehouses have been much more aggressive when it comes to dumping lawsuits on their advisers in an attempt to keep them — and the client assets they control — on the firms' payroll. Such tactics, however, have been on the wane for more than a decade: In 2004, Merrill Lynch, UBS PaineWebber and Smith Barney signed what is known as the Protocol for Broker Recruiting. Prior to that, brokers who left big firms found themselves subject to temporary restraining orders — the dreaded TRO — and lawsuits that sought to prevent them from soliciting clients.

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Founded in 1989, Triad gained traction in the independent broker-dealer marketplace 10 to 15 years ago when it was among the first to aggressively court so-called "hybrid" advisers, those with businesses that operated as both brokers licensed with the Financial Industry Regulatory Authority Inc. and as advisers registered with the states or Securities and Exchange Commission.

With that strategy, Triad's business took off. In 2007, the firm produced total revenues of $59.4 million, according to InvestmentNews data. Less than a decade later, by 2015, revenues at Triad had more than tripled, reaching $184 million. Like many independent broker-dealers, Triad's business dipped in 2016, and the firm reported $173.2 million in total revenues, a year-over-year decline of 5.9%.

PULLING THE STRINGS

In explaining why he and his partners left, Mr. Millican expressed his opinion that Ladenburg Thalmann was pulling the strings at Triad, and operating the firm less as a stand-alone regional shop with its own culture and more like a piece that fit in with Ladenburg's other independent broker-dealers: Securities America Inc., Investacorp and Securities Service Network.

Specifically, Triad in 2014 approved a hedge-fund strategy Atlanta Capital wanted to use and then suddenly pulled the plug a year later after the company had invested $1 million in the strategy, according to Atlanta Capital's arbitration claim.

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