Two of the biggest blowups in the retail-investing business are wending their way through legal channels, with plaintiff's attorneys looking far and wide to place blame in order to win money for clients.
Last week, attorneys for clients of a collapsed $250 million Ponzi scheme said they were considering suing the accounting firm that worked with the disgraced Detroit-area investment manager Edward May.
The accounting firm, Doeren Mayhew Certified Public Accountants and Consultants of Troy, Mich., endorsed a series of companies that turned out to be fakes, according to the Securities and Exchange Commission.
The investments were sold by Mr. May and Frank Bluestein, a Detroit-area broker who until October was affiliated with GunnAllen Financial Inc.
Doeren Mayhew was prominently mentioned on prospectuses of the bogus companies offered by Mr. May's firm, E-M Management Co. LLC of Lake Orion, Mich.
"Persons seeking information relative to the background and experience of the promulgator of this project may call Mr. Todd Fox of Doeren Mayhew CPAs," according to the prospectus for one of the private offerings, H.P. Project Eleven LLC.
"Mr. Fox is authorized to answer any questions about the other entities managed by the offerer," according to the prospectus.
In another case, more than 40 arbitration claims have been filed against Brookstreet Securities Corp., an Irvine, Calif.-based independent broker-dealer that closed last summer due to losses from investments in collateralized mortgage obligations
(InvestmentNews Daily, Jan. 16).
But attorneys are also taking aim at Brookstreet's clearing firm — National Financial Services LLC, a unit of Boston-based
Fidelity Investments — for their clients' losses, naming both companies in their claims.
Brookstreet Securities had about 500 affiliated representatives at the time it toppled last June.
"We believe the claims are without merit," said Vin Loporchio, a spokesman for Fidelity. "Decisions to take margin loans are made by clients and brokers, not clearing firms."
PHONY INVESTMENTS
In the matter of Mr. May, attorneys are also set to take on the independent-contractor broker-dealers at the firm where his associate, Mr. Bluestein, worked.
One plaintiff's attorney, Tony Trogan of West Bloomfield, Mich., estimates that Mr. Bluestein sold about two-thirds of the phony $250 million investments and that Mr. May sold the rest.
Mr. Trogan stressed, however, that his calculation was guesswork. "I don't think anybody knows," he said.
From 2000 to 2005, Mr. Bluestein, whose firm Maximum Financial Group Inc., was based in Waterford, Mich., was affiliated with Questar Capital Corp., formerly based in Ann Arbor, Mich., and now based in Minneapolis. After that, he left Questar to join GunnAllen Financial Inc. of Tampa, Fla., where he worked until October.
Mr. Bluestein is not registered with a broker-dealer, and in November, the SEC charged Mr. May with perpetrating a massive Ponzi scheme that turned as many as 1,200 investors, many of them elderly, into victims.
One investor who lost about $100,000 said the presence of Doeren Mayhew, the accounting firm, was instrumental in his decision to invest with Mr. Bluestein.
"That's why my wife and I got into this investment," said the man, who asked not to be identified. "It had all the hallmarks of a valid investment."
A lawsuit against Doeren Mayhew could allege "accounting malpractice," said William Shepherd, partner in Shepherd Smith & Edwards LLP of Houston.
Not so, said Mark Crawford, Doeren Mayhew's managing director. The accounting firm worked with Mr. May, but only to prepare tax returns for clients. The language in the prospectus "was not authorized by us," Mr. Crawford said.
"We never sold any. We never did an audit" of the sham companies, Mr. Crawford said.
The accounting firm had "direct interaction with various investors," Mr. Shepherd said.
GunnAllen also may face more than 100 potential securities arbitration claims from investors, many of which are already filed, attorneys said.
Scott Silver, an attorney in Coral Springs, Fla., said his firm expects to file up to 50 claims against GunnAllen over the case.
Mr. Trogan said he has filed about 50 claims totaling more than $6 million in losses against GunnAllen. A handful of those claims are also against Questar, he said.
"This was so pervasive with Frank [Bluestein]," he said. "He sold to everybody, from widows and orphans to high rollers."
"GunnAllen is highly confident that our supervision was more than adequate," said David Jarvis, Gunn-Allen's general counsel. The Ponzi scheme "was intentionally hidden from GunnAllen."
A Supreme Court decision earlier this month may make it almost impossible for investors to win such claims against outside parties like clearing or accounting firms, noted one industry attorney at an independent-contractor broker-dealer, who asked not to be identified.
But one plaintiff's attorney shot down that notion.
The pivotal issue for investors in cases that involve outside parties is "reliance," said Thomas R. Ajamie, whose eponymous law firm is based in Houston.
"Did these investors rely on the representations made by the clearing firm or the auditor? Cases will rise and fall on reliance," Mr. Ajamie said.
He said that the ruling this month by the Supreme Court which shot down the "scheme liability" theory of many class actions will not prevent such lawsuits in the future.
It is not out of the ordinary for investors to sue accounting firms and auditors when companies or investments collapse, attorneys said.
Bruce Kelly can be reached at [email protected].
