A small regional broker-dealer and investment adviser is facing an uncertain future after a $4 million arbitration award has put it in jeopardy of failing to meet regulatory net capital requirements.
The fate of Resource Horizons Group, which has around 220 brokers and advisers, came into question after a
Financial Industry Regulatory Authority Inc. arbitration panel held the firm responsible for the nearly $3.5 million in losses a group of investors suffered when a former broker at the firm allegedly used client funds for his personal use. The award, which was posted to Finra's website on Wednesday and totals more than $4 million, includes almost $1 million in punitive damages.
It is unclear if the firm has the capital to pay the award, according to the attorney who represented the firm in arbitration, Alan Wolper.
The firm, which had a net income of $286,220 last year, only has $468,628 in excess net capital above the $100,000 it is required to keep on-hand to meet regulatory requirements, according to an audited filing with the Securities and Exchange Commission.
As soon as a firm falls below net capital requirements, it is no longer allowed to do business and must direct customers to place orders directly with its clearing firm, he explained.
If the firm is unable to pay the award, it will have to be recorded as a liability on the balance sheet, which would eliminate the firm's excess capital and bring them below the $100,000 net capital requirement. The firm cleared through National Financial Services, which is owned by
Fidelity Investments.
“It's a big charge for a little firm,” Mr. Wolper said. “I'm pessimistic, to be honest.”
Resource Horizon's top two executives, chief executive David Miller and his wife, president Kelly Miller, could attempt to cover the costs themselves out of pocket, Mr. Wolper said. They could also appeal the decision, but it was not yet clear if they intended to do so.
Mr. Miller did not respond to an email for comment, and an operator who answered the phone at Resource Horizons directed comment to Peter Pecci, national sales manager for Kovack Securities Inc.
Kovack Securities has opened its doors to advisers at the firm and could create another branch office, Mr. Pecci said. No official agreement is in place, however.
The arbitration related to a rogue broker at the firm, Robert Gist. In 2013, Mr. Gist agreed to pay to pay $5.4 million to settle charges from the SEC that he had converted around the same amount from at least 32 customers for personal use between 2003 and last year.
He conducted the scheme and made false customer statements for clients through Gist, Kennedy & Associates Inc., an unregistered entity not affiliated with Resource Horizons, according to the SEC's complaint.
Neither Resource Horizons nor its executives were named in the SEC's complaint against Mr. Gist.
John S. Chapman, the attorney who represented the investors in the case, said that's not unusual to not see them named.
“I have yet to see a cease and desist or SEC complaint in a rogue broker situation where the broker-dealer is named right out of the box,” he said. “They tend to grab the low hanging fruit.”
In this case, which was filed on behalf of six individuals and a family
trust, Mr. Chapman argued that the firm missed multiple red flags and relied too heavily on their brokers to self-report compliance information. He said it should have paid closer attention, especially to Mr. Gist, who had several disputes and other disclosures on his record prior to being hired in 2001, according to Finra's BrokerCheck database.
“It's pretty disturbing,” Mr. Chapman said. “The broker-dealer is supposed to be the first line of defense.”
Both Finra and the SEC barred Mr. Gist from associating with the industry.
Many in the industry lamented Resource Horizon Group's possible demise, saying it would be an unfortunate case where one bad apple brought down the whole operation, according to Bradley Fay, president of IBDSearch, a recruiting firm.
“The consensus is that it's just kind of unfortunate,” he said. “It's good people who hired a bad guy.”
The firm was founded in 2000 and had a “decent reputation” and a relatively clean compliance record, Mr. Fay said. The firm only has only two disclosure events on its record, according to a BrokerCheck report.
Mr. Wolper characterized the arbitration panel's decision as “beyond frustrating” and the punitive damages as “inexplicable.”
“This is a case where everybody knows who the bad guy was,” he said. “He got sanctioned by the SEC and barred by Finra.”
“It's a good firm,” he added.
