In what has become
an all-too-familiar scene, another broker-dealer has ceased operations after failing to have sufficient capital on hand.
The
Financial Industry Regulatory Authority Inc. on Friday said that the retail-securities unit of publicly traded Jesup & Lamont Inc. was out of compliance for failing to meet the net-capital requirements mandated by the Securities and Exchange Commission. Due to the violation, Finra ordered Jesup & Lamont Securities Corp. and its 300 reps to cease conducting business other than liquidating transactions.
According to a press release issued today, however, Jesup & Lamont disputes Finra's action and is seeking its reversal. The firm's management said that it has taken other steps to remedy the net-capital deficiency and is seeking to show that the securities unit is in compliance.
As of March 31, Jesup & Lamont Securities had net capital of $771,652, which was $521,652 in excess of the minimum net-capital requirement, the firm's parent company said last month in its 10-Q filing with the SEC. That filing also revealed that parent Jesup & Lamont Inc. has been losing money of late. Over the first three months of the year, the company lost $3.75 million, compared to a loss of $2.9 million for the same time period in 2009.
The parent company has been working to beef up its capital position for months, to no avail so far. In February, the firm said it reached an agreement in principle with Tri-Artisan Capital Partners LLC, a merchant bank, to combine the two firms. Part of the deal was the completion of a capital-raising “to fund the combined company's growth plan,” according to a press release at the time.
The deal was supposed to close by the end of the second quarter, but it is not clear whether the transaction was ever completed. Gerald Cromack, co-managing partner with Tri-Artisan, was not available in the early afternoon to comment.
But an executive familiar with net-capital rules, who asked not to be identified, said a net capital-requirement notice from Finra is often "a death sentence." Although the executive did acknowledge that there is potential for an order to be reversed, he noted that said such reversals hinge on negotiations about the cause and amount of the capital deficiency — such as legal liabilities — along with plans to rectify the shortfall.
"If Finra thinks it's time to go, they are all-powerful," the executive said. "Finra holds all the cards here."
Certainly, receiving a a cease-business letter is not an encouraging sign for a brokerage. Jesup & Lamont Securities is at least the second firm in the last three months that Finra sent such notifications to for failing to meet net-cap requirements. In March, Finra told GunnAllen Financial Inc., an independent broker-dealer with about 400 reps, that it was violation of its net-capital requirements.
(See a full timeline of B-D closings here.)
Finra recently has informed other small to midsize broker-dealers that the lack of adequate reserves is a serious issue. In November, Finra said Cullum & Burks Securities Inc. was in violation of its net-capital requirement. The firm then raised additional capital to continue normal operations, according to its Finra record.
That was not enough. Finra in May suspended the license of Cullum & Burks, which was heavily involved in the sale of private placements that went bust.
Jesup & Lamont has been on Finra's radar at least since April. According to the firm's profile on Finra's BrokerCheck database, the firm “failed to timely respond to Finra requests for documents and information.”
That request for documents was related to a nasty legal fight in March between Jesup & Lamont, Finra and Penson Financial Services Inc., one of Jesup & Lamont's former clearing firms. Jesup & Lamont accused Penson of conspiring with Finra to shut down a former Jesup unit, Empire Financial Group Inc., and of helping another Penson correspondent firm raid Empire's profitable trading desk.
That dispute went to Finra arbitration. It's not clear whether that legal fight contributed to the firm's net-capital violation.
Regardless, recruiters were calling Jesup & Lamont's brokers Monday morning, trying to turn the firm's misfortune to their advantage, sources said.
Alan Weichselbaum, who was named Jesup & Lamont Securities' CEO just last month, was not available Monday morning to comment.
