An elite private banking duo formerly with Bank of America Merrill Lynch is considering legal action against the firm after being terminated last month, according to an attorney for the team.
“We believe that Merrill Lynch acted inappropriately and we look forward to testing the actions of Merrill lynch,” said Thomas Lewis of Stevens & Lee. “We don't intend to let this sit.”
Merrill Lynch's primary allegation, which the firm reported in a filing with the Financial Industry Regulatory Authority Inc., was that the two advisers, James Goetz and Stephen Brown, were terminated for “conduct related to not disclosing outside business activities and participation in private securities transactions involving clients,” according to BrokerCheck.
The allegations by the firm against the duo, who co-managed a combined $2.5 billion in assets, are likely related to a group of ultra-wealthy clients who knew each other through prior business relationships and would make investments in each other's start-up ventures, according to interviews with current and former team members who spoke on condition of anonymity.
Mr. Brown declined to comment except for saying that that none of the investments in question involved a hedge fund, contrary to initial reports.
Mr. Lewis declined to comment on specific allegations ahead of potential litigation, but said that Mr. Brown and Mr. Goetz had only been acting in their clients' best interest.
Spokespeople for Bank of America Merrill Lynch also declined to comment on the potential lawsuit.
Questions may revolve around the extent of the advice Mr. Brown was providing. Although he received no outside commission or compensation from any advice on those investments and no clients were alleged to have been harmed, he had placed his own money with some of the same companies, sources said.
While that is not an uncommon practice, it could have put the advisers in a grey area depending on how those investments were disclosed and what type of advice was given to the clients, according to Ryan Bakhtiari, an attorney with Aidikoss, Uhl & Bakhtiari. Firms have strict rules to avoid claims that a broker was “selling away,” or recommending investments not approved by the firm.
Mr. Bakhtiari is not involved in the Brown and Goetz case.
“It's a real rough line,” Mr. Bakhtiari said, speaking hypothetically and not about this case. “And you could be held accountable for investment advice on investments away from the firm.”
Investing alongside clients is a common practice, according to Brian Hamburger, an attorney who counsels advisers on going independent. Mr. Hamburger declined to speak specifically about the Brown and Goetz case.
But recently, large brokerage firms have become increasingly willing terminate contracts with advisers, even for some of their highest-grossing teams, Mr. Hamburger said, noting that he has been working with six teams of advisers who had been “suddenly” and “unexpectedly” terminated in recent months from brokerage firms that he believed were looking to avoid the “headline risk” related to regulatory violations. He declined to provide specific names of advisers or firms.
“Every one of these instances that we're dealing with involves a set of facts that, if we were looking at this a year ago, would not have led to a termination,” Mr. Hamburger said. “They're making these decisions before they have all the facts that they might have previously required to make these decisions.”
The termination of Mr. Brown and Mr. Goetz culminated a three-month-long investigation that began over the summer, according to a source who had worked with the two.
Sources familiar with the situation said Bank of America Merrill Lynch was reviewing incoming correspondence as part of a routine internal audit when it uncovered a document that appeared to have had information, such as names and addresses, filled in after it had been signed by the client.
At least one of the assistants, three of whom were terminated, had been filling out certain documents, such as W-9s and trustee verification forms, with Social Security numbers and addresses with clients' verbal approval to save time for those clients, who may have been opening multiple accounts with the firm.
Over the course of the investigation, the wirehouse found that the team was helping with other personal services, such as bill pay, which can be a violation of firm policy in certain cases, even if authorized by the client, because of possible risks related to access to client's account.
“We do everything for the client; we provide basically family-office style services,” one of the sources familiar with the situation said. “But we're not a family office and that was the problem.”
Mr. Hamburger said those kind of issues can be a “common conflict,” for advisers who are dually registered as investments advisers and brokers and who answer to different regulatory standards.
“The advice an [investment adviser] can give is much broader,” he said. “It does not have to be limited to an individual securities transactions.”
The team is still in the process of selecting a new firm and attempting to rebuild its business, Mr. Lewis said.
“They're not done,” Mr. Lewis, the team's attorney, said. “It's given Merrill Lynch an unfair advantage to retain the clients and put Mr. Brown and Mr. Goetz in an unfair position.”
“We look forward to our day at Finra when we can have opportunity to tell our whole story,” he added.