When HighTower Advisors LLC was launched in 2008, its pedigree and promise caught the industry's attention and the interest of a number of highly successful advisers.
Its prominent backers included former Morgan Stanley chief executive Philip Purcell and David Pottruck, ex-CEO of The
Charles Schwab Corp. In the spring of 2009, it scored a coup by recruiting Richard Saperstein from J.P. Morgan Securities Inc. Mr. Saperstein carried with him a $10 billion book of business, mostly in bonds and cash management for institutions and high-net-worth clients.
The independent-broker-dealer and advisory firm's pitch was compelling. It had an open architecture of leading custodians and clearing firms, advisers had access to an equity stake in the firm, and they also had an opportunity to act as fiduciaries for clients.
But despite many outward signs of success, HighTower, which has about 30 advisers in total and controls about $16 billion in assets, is facing legal challenges that, if they continue to mount, could raise serious questions for advisers looking to join the firm, industry observers said.
In February, the firm was hit with its first “lift-out” lawsuit after recruiting a team from Morgan Stanley Smith Barney LLC that manages $500 million in assets. MSSB alleged that the brokers who left for HighTower solicited clients while they were still affiliated with the firm and took confidential information with them.
Such lawsuits are regarded as a common — but expensive — nuisance in the retail-securities business, where recruiting brokers from rivals is an essential element in expanding a firm.
More seriously, the firm last month found itself enmeshed in lawsuits and arbitration claims related to a HighTower adviser's selling private notes of a feeder fund into what turned out to be a $1.4 billion Ponzi scheme.
“This is a pristine firm, and it's saying, "We're only going after ultrahigh-net-worth clients,'” said Rick Peterson, a recruiter. “This kind of puts a dent in it.”
In the post-Madoff era, wealthy clients are looking for safety more than ever and need a lot of convincing to move accounts from white-shoe private banks such as The Goldman Sachs Group Inc. or JPMorgan Chase & Co., Mr. Peterson said. “This kind of stuff has been going on forever in the securities business, but we're in a new era. Madoff put us there.”
While HighTower tries to set a high standard for itself, some experts said, such incidents are simply part of the securities business.
“Is HighTower just another broker-dealer? No,” said Steve Winks, principal with SrConsultant.com. “It supports the fiduciary standard, and that's a good thing. But there are issues outside of HighTower's control, and every major firm has conflicts. HighTower is trying to have fewer conflicts.”
That said, legal trouble is nothing new for HighTower.
Going back to 2008, the firm was dogged by a lawsuit in federal court in Texas with allegations that HighTower interfered with another firm's business. The suit alleged that HighTower's then-CEO, Elliot Weissbluth, interfered with the business of U.S. Fiduciary Inc., a defunct broker-dealer and advisory firm where Mr. Weissbluth was a divisional president, then president, from 2004 to 2007. As a manager of HighTower's holding company, HighTower Holding LLC, Mr. Weissbluth is still very much involved in the broker-dealer's operations.
The lawsuit alleged that Mr. Weissbluth altered the employment agreements of certain brokers at the firm, leaving U.S. Fiduciary “defenseless” against the brokers' departure from U.S. Fiduciary. The lawsuit also alleged that Mr. Weissbluth, beginning in 2006, “suddenly tried to change the ordinary course of dealings by commandeering any meetings with prospective investors and doing his best to shoulder aside Fiduciary's CEO,” Steven Graubart.
One of those investors was Mr. Purcell and his investment group, Continental Investors LLC, according to the lawsuit. Mr. Graubart “had extensive discussions with Continental Investors about investing in Fiduciary, but suddenly, Weissbluth held a surprise meeting with Purcell that excluded Fiduciary's CEO,” the lawsuit claims. “Purcell lost interest in investing in Fiduciary immediately after his surprise meeting with Weissbluth.”
That suit was moved into arbitration with the Financial Industry Regulatory Authority Inc. last year and was settled confidentially, said Katherine Treistman, an attorney with Susman Godfrey LLP, who represented the plaintiffs, U.S. Fiduciary, in the federal lawsuit but not in the Finra arbitration.
“We take these matters very seriously,” Mr. Weissbluth said without elaborating on the lawsuit. “Our primary responsibility is to serve our clients and always put their interests first.”
He said that the firm is committed to transparency. “Ultimately, our reputation is staked on how we approach our work and the relationships we build with our clients,” he said.
Mr. Graubart did not return calls for comment.
No matter what, HighTower has a number of supporters. The industry is brimming with players looking to make a splash in the very field that HighTower has staked a claim by creating an independent firm with a truly open platform where brokers and advisers gain a stake in the firm.
They point to firms such as Focus Financial Partners LLC and United Capital Financial Partners LLC as examples of small firms of brokers and advisers with potential to have a large impact on the financial advice marketplace for wealthy investors.
“All three could be successful, and that helps define what the emerging firm is going to look like,” said Tim White, partner with Kaye/ Bassman International Corp., an executive recruiting firm. “There's a big divergence between the huge wirehouse firm and the individual advisory firm.”
E-mail Bruce Kelly at [email protected].
