Capital shortage leads WJB to shutter B-D operation

WJB Capital Group Inc. has shut its brokerage operations after a year in which the Wall Street firm faced slower trading, a shortage of capital and interest rates of 25% on some debts.

The company, which told its 100 employees about the closing last Tuesday, had $8.17 million of subordinated debt, including $1.35 million due last month, according to a 2010 annual report to the Securities and Exchange Commission. WJB Capital Group also owes $3.5 million it borrowed from executives at interest rates of 10% to 15%, the filing shows.

The shutdown follows the collapse of MF Global Holdings Ltd., which filed for bankruptcy protection Oct. 31 after a $6.3 billion bad bet on the bonds of some of Europe's most indebted nations.

Smaller broker-dealers may struggle amid a decrease in equity trading and face higher operating expenses tied to provisions of the Dodd-Frank Act, said James Angel, a finance professor at Georgetown University's McDonough School of Business.

Average daily equity trading on major U.S. exchanges was about 7.8 billion shares in 2010, a 20% drop from 2009, according to data compiled by Bloomberg.

HIGHER COSTS

“There are all of those costs that are ratcheting up in a business that is ratcheting down,” he said. “The regulatory environment in the Dodd-Frank world is making things even harder, especially for smaller firms.”

WJB Capital Group reported net income of about $221,000 in 2010 on revenue of $45.9 million, according to the annual report.

WJB Capital Group called its employees into a meeting in New York last week, with branch staff members listening via a conference call, to notify them about the shutdown, said Mark Skolnick, general counsel for the company at law firm Platzer Swergold Karlin Levine Goldberg & Jaslow LLP.

Closely held WJB Capital Group has nonbrokerage operations and is exploring “other possibilities,” he said.

The company was “unable to raise capital in a manner that would have allowed the firm to continue its operations, given the current climate and the constraints that would have been placed on everyone,” said chief executive Craig A. Rothfeld.

VOLUNTARY SHUTDOWN

The shutdown was voluntary, he said.

Mr. Rothfeld didn't return subsequent telephone and e-mail messages last Tuesday seeking comment on the company's debts and whether any of it had been repaid last year.

WJB Capital Group loaned $1.92 million to three unidentified stockholders at a rate of 4.5% in January 2006, according to the annual report filed with the SEC. In January 2009, the loan maturity dates were extended to January 2014, and the annual interest rate was reduced to 1.5%.

About $1.85 million was outstanding as of Dec. 31, 2010, the report shows.

The firm also had loans outstanding to 14 employees totaling $4.81 million as of that date, with interest rates as low as 0.5%, according to the annual report.

WJB Capital Group simultaneously was borrowing a combined $3.5 million from two stockholders, Mr. Rothfeld and co-founder Michael N. Romano, at interest rates of 10% to 15%.

The loans from Mr. Rothfeld and Mr. Romano are subordinated, according to the report, which adds: “To the extent that such borrowings are required for the company's continued compliance with minimum-net-capital requirements, they may not be repaid.”

The company also owed $750,000, due Dec. 30, carrying a 25% interest rate. The lender's identity wasn't listed.

The accounting firm Marks Paneth & Shron LLP audited the 2010 financial statements, according to the annual report.

A message left with an assistant for Mark Levenfus, the accounting firm's managing partner, wasn't returned.

“HIGH-QUALITY TALENT’

WJB Capital Group announced new hires as recently as last month when the firm said that it added four equity analysts, including Bryan Maher and John Newman from Citadel Securities LLC, according to a Dec. 8 statement.

“Fortunately and unfortunately, 2011 is providing growing entrepreneurial firms like ours the opportunity to add more high-quality talent,” Mr. Rothfeld said in the statement.

MF Global's collapse has increased scrutiny of broker-dealers of all sizes, said Mark Williams, a lecturer at Boston University's School of Management.

He cited the investment bank Jefferies Group Inc., which slid 48% last year and has sought to reassure investors that it doesn't face the risks that destroyed MF Global.

“If the market's looking up the pyramid, questioning whether they can survive, then why wouldn't the market also look down and look at smaller shops like WJB?” Mr. Williams said.

WJB Capital Group doesn't hold client funds or assets, “so there's no impact on customers,” said Michelle Ong, a spokeswoman for the Financial Industry Regulatory Authority Inc.

She declined to elaborate on reasons for the shutdown.

The firm has “no plans” to file for bankruptcy, said Mr. Skolnick, who declined to comment about whether the company plans to pay severance.

FRAUD ACCUSATION

WJB Capital Group and Mr. Rothfeld were accused of fraud and breach of contract by an individual who said that he made a $250,000 investment in the company, according to a complaint filed Dec. 31 in New York State Supreme Court in Manhattan.

The plaintiff, James McNally, said in his complaint that he was promised “compensation for the duration of the investment.” 

WJB Capital Group failed to pay and used the money “for fraudulent purposes,” according to the complaint.

Mr. Rothfeld said in an interview that Mr. McNally provided an eight-year, $250,000 loan to the firm, not an equity investment, and received monthly interest.

“We deny the allegations,” Mr. Rothfeld said about Mr. McNally's complaint. “They are baseless and without merit.”

HISTORY OF FIRM

WJB Capital Group, founded in 1993 with two agency brokers on the floor of the New York Stock Exchange, had offices in five U.S. cities and ran live trading desks for all the nation's major equities and options exchanges, according to its website.

The firm grew from 10 employees to more than 100 over the past decade. Public brokerage records on Finra's website list nine owners and executive officers, including Mr. Rothfeld, Mr. Romano and co-founder William J. Bonfanti.

Eric Ryan, a NYSE Euronext spokesman, declined to comment.

“Trading volumes are significantly down from the prior year, and the trend going into this year is also pointed downward,” said Richard Repetto, an analyst at Sandler O'Neill + Partners LP, an investment bank that specializes in financial firms. “For any broker, the current environment poses head winds.”