John Sykes, the largest single shareholder in defunct broker-dealer GunnAllen Financial, says he was in the process of brokering an eleventh-hour deal to save the cash-starved firm when securities regulators abruptly shut it down last month.
According to a letter he wrote to InvestmentNews, Mr. Sykes said he was in negotiations to buy certain assets from GunnAllen — and that the purchase price would have more than covered the $1 million regulators deemed it needed immediately to remain open for business — when the
Financial Industry Regulatory Authority Inc. closed down the firm March 22.
(Read the full letter here.)
“Needless to say, this [Finra's action] came as a shock to us and I'm reasonably certain, a shock to the management team at GunnAllen,” Mr. Sykes wrote in the letter.
In the weeks leading up to Finra's decision, a group of investors led by Mr. Sykes approached GunnAllen officials seeking a purchase of certain unnamed company assets, Mr. Sykes wrote. The group was looking to buy the assets for another broker-dealer and wealth management firm Mr. Sykes controls, JHS Capital Advisors Inc., which had acquired other GunnAllen assets in the months before the firm's demise.
For example, on March 12, JHS Capital offered to buy certain GunnAllen assets that would have added $2.2. million to the company's escrow account, which could be set aside for claimants in lawsuits against GunnAllen, he wrote.
(What are your thoughts on Mr. Sykes' letter, or the story behind the GunnAllen story? Join the conversation here.)
GunnAllen's legal liabilities were staggering. In the letter, Mr. Sykes said GunnAllen faced $56 million in claims from investors for a variety of investments that turned sour, including sales of private deals by former broker Frank Bluestein, whom the Securities and Exchange Commission charged with fraud last year for his alleged role in a $250 million Ponzi scheme.
(View the timeline of GunnAllen’s fall here.)
Officials from GunnAllen contacted his group on March 19, “seeking to make a deal and requesting us to consider the purchase of the total company, or at least, certain assets of the company,” he wrote.
“The reason given for that request was the audit which had been made by the auditors for GunnAllen, as well as audit oversight by Finra, which indicated the immediate need for $1 million,” Mr. Sykes wrote. “It was indicated to us at that time, it would be necessary for the funds to be made available on Monday, March 22, 2010, or there was a strong possibility the company would need to declare they did not have sufficient net capital.”
Along with legal liabilities, the firm created a tremendous burden of debt to finance a growth spurt between 2003 and 2004, which created an added drag on the company, he wrote.
Mr. Sykes and others from his investment group resigned in early December from the board of Gunn Allen Holdings Inc., a move that stunned the firm's advisers and led regulators to question the firm's solvency. The cost of litigation was simply too much, Mr. Sykes wrote.
“It just did not make sense for our investment group to have 85 cents of every invested dollar go to the settlement of legal claims and legal expense, as it would not allow any funds to grow the company to create a return for its investors,” he wrote.
Mr. Sykes and his group purchased GunnAllen Holdings in November 2008 for $10 million, which was the projected amount needed to meet the firm's exposure to the Bluestein matter, as well as other expenses.
