A broker with HighTower Advisors LLC, the startup with the sterling pedigree, has been sued over the sale of notes into a feeder fund for what turned out to be a massive Ponzi scheme.
Investors in Florida filed two lawsuits in state court in Palm Beach County this month against HighTower and one of its brokers, Curtis Lyman, alleging investment fraud, the sale of unregistered securities, breach of fiduciary duty and negligence.
The two investors filing the suits, Deborah Marlin and Robert Kimmel, claim they invested $217,000 and $4.4 million, respectively, in promissory notes with Banyon 1030-32 LLC. Banyon went into default on the notes in November when the $1.4 billion Ponzi scheme, controlled by disbarred attorney Scott W. Rothstein, was exposed.
In January, Mr. Rothstein pleaded guilty to running the largest investment fraud in the history of South Florida. When he is sentenced May 6, he could receive up to 100 years in prison.
The Banyon fund was controlled by George G. Levin. According to the lawsuits, Mr. Lyman told investors that Mr. Levin was looking for capital to put into structured legal settlements. Mr. Lyman allegedly told investors that Banyon would produce a guaranteed rate of return through the notes. The plaintiffs also claim the adviser stated the investment was low-risk, safe and secure.
According to court documents, the promissory notes were scheduled to pay a return of 16% per year. Mr. Lyman's clients were investing in Banyon notes as late as October 2009, weeks before the Ponzi scheme was revealed, the lawsuit alleges. The lawsuit does not state the commission Mr. Lyman was paid to sell the notes.
According to records with the Financial Industry Regulatory Authority Inc., Mr. Lyman joined HighTower in December 2008.
Mr. Lyman told investors that “he normally did not do ‘private deals' as he was very leery and cautious of them,” but that he had known Mr. Levin for a long time and that he personally guaranteed the notes, according to the lawsuits.
HighTower has been a high-profile firm since it opened in 2007. Led by investors such as former Morgan Stanley chief executive Philip Purcell, and David Pottruck, ex-CEO of
Charles Schwab Corp., HighTower has successfully recruited major adviser teams and talent from Wall Street firms.
Indeed, the Chicago-based company announced today that it is hiring Michael LaMena, a former executive director of Morgan Stanley Smith Barney LLC's private wealth management operations in New York, as chief operations officer. He is a 14-year veteran of Morgan Stanley.
HighTower's advisory group has more than $1 billion in client assets, according to its filing with the Securities and Exchange Commission. Published reports indicate that, overall, HighTower has attracted $16 billion in client assets.
The broker named in the suits, Mr. Lyman, allegedly told clients he was confident in the Banyon investment just months before it collapsed.
“I remain comfortable on the Banyon program,” Mr. Lyman wrote in an e-mail to a client in June 2009.
“Business has remained strong and they have not ‘oversubscribed' their demand, which is the biggest business risk I think they have. We are monitoring that closely, but, at the moment, they are working to raise over 300 million dollars in order to retire more expensive hedge fund lines,” he wrote. “My recommendation is to renew the notes.”
This is not a case of a broker “selling away,” or selling investments without the knowledge of his broker-dealer, said Scott Silver, a plaintiff's lawyer representing one HighTower client who bought the Banyon notes.
As an indication that HighTower approved the product, Mr. Silver pointed to the fact that Banyon appeared on the account statements of Mr. Lyman's clients.
“We were shocked that HighTower approved the sale of Banyon to its customers,” said Mr. Silver, who added that he is filing a $1 million arbitration claim against HighTower today with charges similar to those in the two other investor lawsuits.
Fidelity Investments is HighTower's custodian.
When asked whether HighTower approved the Banyon product, Jennifer Connelly, a spokeswoman for the firm, said that the Banyon fund was not, at any time, on the HighTower platform. “These are legacy investments predating Mr. Lyman joining HighTower,” she said.
Ms. Connelly also said Mr. Lyman invested in the Ponzi scheme prior to joining HighTower.
“Mr. Lyman, prior to joining HighTower, invested his own capital along with several of his clients' into this Ponzi scheme,” she said. “He did not receive any economic incentive to make these investments and is a victim, as are the others who were defrauded by Rothstein.”
Prior to signing on with HighTower, Mr. Lyman worked for USF Securities LP, USF Advisors LLC and Capital Market Strategies LLC, according to his Finra records. Elliot Weissbluth, a manager of HighTower Holdings LLC -- the holding company that owns the broker-dealer -- was the president of USF's brokerage and advisory units when Mr. Lyman was hired by the Houston-based firm in Nov. 2005.
Mr. Lyman made the Banyon investments after Mr. Weissbluth left the US Fiduciary and USF Advisors management team in 2007, Ms. Connelly said.
