Friday, June 22, 2018
Business

GunnAllen exec details demise of the Tampa brokerage firm in new book

David Levine's friends jokingly suggest he should look under his car seat for a bomb. Or maybe start wearing a Kevlar vest.

He has to have enemies, they figure, after writing such a harsh, tell-all book about the costly demise of the once-thriving Tampa brokerage firm GunnAllen Financial and broader problems within the securities industry.

In his recently published, 426-page book called The Financial "Fix," Levine spreads the blame for a rogue environment that led to GunnAllen's collapse into bankruptcy four years ago. The chief culprits as he identifies them:

• Bad brokers within the company — perhaps as many as 50— who brought down 700 or so good brokers and left thousands of clients in the lurch.

• A management team that built its business by hiring ethically questionable brokers who no one else wanted and then was reluctant to fire or discipline them.

• The Financial Industry Regulatory Authority (FINRA), the self-regulated overseer of the securities industry, only cared whether GunnAllen had enough money to operate and not whether investors were being hurt. By keeping the company afloat, FINRA profited from fines coming in to the agency.

Levine, 48, was initially recruited as a consultant to Gunn­Allen, became its executive vice president, and wound up staying "till the bitter end," he says.

In 2011, Levine was censured and fined by the Securities and Exchange Commission, accused of improperly taking customer information for 16,000 accounts with him when he left GunnAllen. Levine insisted he did nothing wrong and had the company's permission.

He has since renounced the securities industry, leaving his license behind. And he has refashioned himself as a man on a mission to warn companies and individual investors to be careful who they invest through.

At his Boca Raton company, InvestorProtector Solutions, he has given himself the title managing protector.

Some excerpts from a recent interview with the Times:

Why did you write the book?

To me, GunnAllen was a symptom of a much larger problem. It wasn't Tampa; it wasn't Gunn­Allen. What I saw there was that the financial industry was deeply flawed.

I went in there as one of the good guys trying to clean it up. When I left, the toll personally and professionally was awful. Then I had a problem with the SEC for something that was authorized with the firm. I thought: "This is nuts. The company is covering up its failings. Now I'm getting blamed for taking a list that was given to me."

First I got angry. Then I started looking at this and realized this was ridiculous.

The problem was FINRA. … The firm should have been shut down by FINRA (for operational problems). FINRA just said that you lack adequate capital. (GunnAllen) needed to pony up more money. It was that simple.

I came to the shocking conclusion (that) FINRA is running a Ponzi protection scheme. The (agency) is constantly taking in more money that it ever (pays out) to investors. If it weren't for those fines, FINRA would be operating at a loss.

How did FINRA's "Ponzi protection scheme" unfold in GunnAllen's case?

GunnAllen had multiple examples of churning. … What would have happened if the regulators shut the firm down? (Instead) it was settled with a fine and the fine was payable in installments. Literally like on a credit card.

You had a firm that should have been put out of its misery but was allowed to cause more harm to investors so it could continue to pay its fine.

How did you end up at GunnAllen?

I came on as a consultant at a monthly rate. I wound up becoming an employee and an officer and getting more involved in management.

When did you sense problems?

Fairly quickly. I remember coming in one day and seeing a guy basically escorted from the building — one of their top brokers. He had tried an extortion scheme on a public company. When I came on, there was also a new compliance officer and new CFO. There was a whole wave of new people.

I refer to it as the new guard versus the old guard. It was very much a house divided. I was doing battle with a bunch of people.

There was generally speaking less of a failure to supervise than a failure to fire. There were multiple cases where misconduct was known. The one that is the most notorious was (one-time star Michigan broker) Frank Bluestein (who raised $74 million in what the SEC described as a Ponzi scheme targeting elderly investors.) The irony there is that by all accounts, Frank didn't exhibit warning signs.

What bothered me was when we knew there were issues and management wouldn't act.

There were other cases of bad broker behavior as well. Like Neal Smalbach, who was convicted of defrauding seniors.

Neal Smalbach was more harmful locally. It was not in the same size (as Bluestein) but the pattern was similar. They were both financial predators who would lure people in. Neil would do free dinner seminars. They're the ones that really stuck out (along with) Jeff Southard (who was sentenced to 15 years on charges of securities fraud and money laundering). … Southard and Smalbach had warning bells ringing from the day they became affiliated with GunnAllen.

So this was a case of bad supervision?

It was failure to fire bad brokers. And they shouldn't have hired these guys in the first place.

I would say, "Why are we offering money to guys … that most firms won't hire?" Yet we're offering them an upfront check and very high payout.

After an investor group led by Tampa businessman John Sykes secured a controlling interest in GunnAllen, he put his right-hand executive, Gordon Loetz, in charge as CEO. How did Loetz's sudden death in 2009 from a boating accident change things?

I felt like Gordy was making changes. Literally, the weekend of Gordy's death, Gordy had said that management changes are coming, and we had to restructure the company. I was told we were going to right-size the firm. I was told we were going to get rid of the opposition and the high-risk people.

When Gordy died, the hope I had for Gunn­Allen pretty much died.

Who ran the company then?

Scott Bendert, who had been (chief financial officer) of the holding company. If you go back to Sykes' history, Gordy and Scott were put in together. He had his core team, but he lost the leader. Scott's a good guy, but he's a numbers guy. Gordy was making changes.

Eventually, Sykes pulled out of the company.

There were other firms like us. There were many firms that weathered the storm.

John had already lost a ton of capital (but) had he put up more money, he could have ridden this storm through. (In a separate interview with the Times, Sykes challenged the accuracy of how he was portrayed in Levine's book. He said his team did get rid of some bad brokers and he put more than $15 million into the company, including $1.6 million when he left to help management keep afloat. Most of the money, he said, went to pay legal bills tied to past mismanagement.)

In an interview back at the end of 2009, you defended GunnAllen's financial shape and accused some journalists and recruiters of making up stories that scared clients.

The truth is GunnAllen was always very thinly capitalized. … I don't know that I was downplaying the capital (in 2009). I was saying that we had three different deals on the table (to put more money into GunnAllen).

There was very much the hope something would happen. What happened was FINRA came in and said, "You don't have the capital." So we never got the chance.

You've talked about the markets being rigged so investors don't have a level playing field. How so?

I love how flash trading got all this attention. It's right, but it misses the mark. There's a spread on every single stock trade. You have to price a bid and an ask. This was done long ago to create liquidity. The spread was always there.

The real issue isn't the spread; it's who is on each side of the spread. The top of the box is the ask and the bottom is the bid. On the right are investors and on the left is Wall Street. Investors always have to buy high on the top, but if they go to sell, they have to sell at the lower price at the bottom back to Wall Street. We're always disadvantaged to Wall Street. That's rigged by design.

What's been the reaction to your book?

I have had brokers cheering saying, "I can't believe you called out FINRA for what they are."

I've had some calls from former GunnAllen people. The best call I had is, "Please don't say you're trying to make GunnAllen out as a bad firm." I said, "I don't have to; they did it to themselves."

Jeff Harrington can be reached at [email protected] or (813) 226-3434.

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