GunnAllen autopsy: Tampa brokerage died of multiple wounds, "inmates running asylum"
Wake up and good morning. How did Tampa's GunnAllen Financial brokerage firm fall so far so fast, ending up shut down last month for both a lack of sufficient capital and, apparently, enough common sense to keep tight management controls over rogue elements at the firm?
"You cannot let the inmates run the asylum, and that's where the firm failed," former general counsel David Jarvis told Investment News, a trade publication that has most closely followed GunnAllen's spiral to failure. You may recall that financial regulators stepped in on March 22, shutting down GunnAllen for the firm falling below minimum capital requirements. Here's earlier coverage of that event.
Now comes a more detailed autopsy of the firm, with some details we know and some fresher insights. The March 29 Investment News story headlined Who -- or what -- killed GunnAllen Financial? makes the following points:
1. Rogue brokers like Frank Bluestein (photo, right), a GunnAllen broker in Michigan, lacked oversight at the same time he was, according to the Securities and Exchange Commission, soliciting 800 investors who placed $74 million in an alleged Ponzi scheme that went bust in the summer of 2007.
2. Did GunnAllen's top officers have a clue what Bluestein was doing? Here's what GunnAllen national sales manager David Levine told Detroit magazine DBusiness that same summer: "Frank is the smartest and hardest-working guy I know. The numbers don't lie." Here's an in-depth 2007 story from the St. Petersburg Timeson the early Bluestein debacle. In 2009, the SEC would charge Bluestein with fraud.
3. Levine was back in the news again with rose-colored glasses just several months ago in a St. Petersburg Times interview. In December 2009, GunnAllen has securities regulators combing over its books. Its primary owner, John Sykes, recognizing GunnAllen's woes could not be fixed, had just departed as board chairman. So what does Levine say in the interview about the company's assessment of the situation? "So far, the firm is having a good month." Three months later, GunnAllen was over.
4. Another contributor to GunnAllen's demise was the fallout suffered by the firm's selling $39.5 million in oil and gas private placements from Provident Asset Management. The regulator known as Finra -- the Financial Industry Regulatory Authority Inc. -- expelled Provident from the securities business this year. Last year, the SEC charged it with fraud.
5. GunnAllen's reputation for hiring brokers with poor reputations and compliance problems with regulators are well documented. Investment news notes that in 2005,4.5 percent of GunnAllen's brokers were on heightened supervisionby the compliance department. That was based on their having three of more "knocks" or "yes" answers on their U4 registrations forms with the National Association of Securities Dealers (NASD) as registered representatives. Overall, just 0.6 percent of registered reps in 2005 had three "yes" knocks on their records. GunnAllen had become a magnet for less scrupulous reps.
6. Investment News interviewed one anonymous broker who said GunnAllen co-founder Donald "Jay" Gunn wanted the firm to be the next Merrill Lynch but was too quick to believe brokers who lied to him about their backgrounds.
7. GunnAllen's other co-founder, Richard "Allen" Frueh, was interviewed by the trade publication last month, denying the firm looked the other way when hiring brokers. He blamed the historic market downturn and the change in the firm after it was sold in September 2008 to John Sykes.
8. A potential buyer of GunnAllen in January, Progressive Asset Management in California, was announced but the deal fizzled.
Now watch for John Sykes (photo, left), who once wanted to build GunnAllen into a better managed firm, to emerge later this year with the same ambition but with his own Tampa firm: JHS Capital Advisors.
-- Robert Trigaux, Times Business Columnist