GunnAllen Financial, in Tampa, Fla., had been in business for six years and had about 200 brokers and $1.2 billion in assets. Its founders, Richard Allen Frueh (pronounced “free”) and Jay Gunn, realized they could not put their growth strategy on hold. So, they went into overdrive, recruiting known producers who were willing to take a chance on a new independent firm that offered open architecture and the freedom to run their businesses how they wanted.
Three years later, GunnAllen has 907 reps and $5.8 billion in assets. But along with all that growth, GunnAllen acquired something else — a reputation for hiring a relatively high proportion of reps with heavily marked up U4s, including some who have received criminal complaints. As recently as July, 4.3 percent of GunnAllen reps were under “enhanced supervision,” because they had three or more marks on their U4s. According to the NASD, only 0.6 percent of the nation's 660,000 registered persons have three dings; only 10 percent have any.
Nobody is accusing GunnAllen of running a crooked business — indeed, the company says it goes to great lengths to investigate the nature of customer complaints and to eliminate the truly bad eggs. And, today, the firm no longer hires reps with more than three marks, no matter the circumstances, says Frueh. But the number of marked up reps still at the firm — and the notoriety of one of the firm's top producers, who has a whopping 24 hits on his U4 — still raises questions. “They've hired a lot of shady brokers,” says a recruiter who asks not to be named. “If you're on the cusp of sloppiness, you could have a place at GunnAllen.” On the other hand, he says, the firm is not in the same league with the notorious bucket shops.
“All the reputable firms we deal with have a list with the names of other firms to avoid,” says the recruiter. “If you've ever worked at one of them — for two months even — they won't hire you. The good news is GunnAllen isn't on that list, yet.” But it's precariously close, he says.
A Bum Rap
Chief executive Rick Frueh says that's a bum rap. “Look, the firm hasn't grown because we hire people with U4 blemishes,” he says. Sure, more reps with bad marks may get hired at GunnAllen than at Merrill. But that's because GunnAllen is willing to look at how the complaint arose — and not to simply eliminate any applicant who does not have a pristine U4. “Do we look at their past? Yes. But we also look past the marks and examine what is the mark — what's the nature of the complaint?” says Frueh. He says of the last 1,000 interviewees, only 152 have been hired.
The firm says it also keeps a close eye on its hires. Indeed, heightened supervision of reps with multiple U4 dings is not a required practice, but is recommended by the NASD. (Some state securities regulators do require it in certain cases.) The NASD proposed the policy of constant surveillance of trades, transactions and emails of reps with more than three customer complaints in a notice to members two years ago. But while it's voluntary, many firms have chosen to adopt its guidance, according to the NASD. Marc Menchel, NASD Regulation general counsel, says that high numbers of reps under heightened supervision certainly will attract more attention from the regulator, “but it also means the firm is doing the right thing.” And, Frueh points out, since July, the firm has decreased the number of reps under heightened supervision by 10 — they resigned or were fired — leaving the number under extra scrutiny at 32, or about 3.5 percent of the broker force.
Danny Sarch, a recruiter and founder of Leitner Sarch Consultants in White Plains, N.Y., says the high number of reps with U4 issues is partly a function of size. To grow as quickly as it did, a small firm like GunnAllen had to look at applicants whose U4 dings eliminate them from wirehouse consideration. “The wires won't touch you if you have three or more, so it's an unfortunate circumstance of being a small start-up firm,” he says. “They have trouble getting A-player brokers unless they've been tainted somehow.”
Frueh came up through the independent-broker ranks in Tampa at Chatfield Dean & Co., where he worked for five years, followed by a brief stint at W.J. Gallagher, and two years as an independent contractor rep at Sovereign Equity Management. (Frueh says he immediately left Sovereign in 1997 after it was revealed that the firm allegedly had ties to a New Jersey crime family.) Frueh says it was experiences like that that made him want to build a better independent firm. Now he thinks the company has reached a size where it can attract better candidates. And, he says, the moment is right to build a major independent network. “I'm confident we can compete with any of the independents,” he says adding, “that both clients and reps want unbiased choice,” a desire the firm says it can meet.
This year the firm has hired 243 reps and GunnAllen's once tiny southeastern footprint now includes 236 offices in 35 states. And while the average GunnAllen rep is a $145,000 producer with $6.5 million in assets, this year's hires average $235,000 in production, $21 million in assets and 11 years in the industry.
Frueh says the firm's improvements to its infrastructure and ever-expanding wealth management platform, which now includes 165 approved money managers, have made it a lot easier to woo reps from better firms. In earlier days, the ranks were dominated by RIAs and independent reps who were switching firms. Frueh estimates that wirehouse reps account for nearly 50 percent of new hires, while reps from regionals represent nearly 25 percent. In early September, for example, a high-profile Morgan Stanley wealth-management team in Atlanta came over to GunnAllen. Gratus Capital managed over $800 million at Morgan Stanley last year and was ranked 48th on Barron's list of Top 100 Brokers in 2004.
A Big Kahuna, In More Ways Than One
But a rep with a Morgan pedigree is not always a good one. One of GunnAllen's top producers — and the rep with the most customer complaints — is a former Morgan broker who remains under heightened supervision per a requirement by Indiana state regulators. He is Indianapolis-based Marc Jaffe, 49, who has made headlines in Indiana, the firm's home state of Florida and in national industry publications for his legal tangles. In June, the 14-year veteran was found guilty of misdemeanor intimidation (he was initially charged with felony intimidation) in an Indiana court and sentenced to one year of jail (it was dismissed), and one year of probation, for leaving threatening phone messages on the answering machines of two former partners at Morgan Stanley after the partnership dissolved. Jaffe was fired from Morgan Stanley in October 2004 because of the calls.
Jaffe came to Morgan in 2001 after 10 years at Merrill Lynch, where he'd become one of its stars in relatively little time. (His success at Merrill even put him on the cover of this magazine in September 1999). He resigned from Merrill in 2001 while under internal review for allegedly exercising unauthorized discretion in customer accounts. According to the Central Registration Depository (CRD), Jaffe has had 24 customer complaints in the past five years, 22 of them arising from his tenure at Merrill, and two related to his time at Morgan Stanley. The majority of the complaints allege churning, unsuitable recommendations and unauthorized trading. Bruce Skolnick, one of Jaffe's attorneys, says disgruntled clients that lost money in the tech wreck and bear market brought the great majority of these cases.
Jaffe's grandmother filed one of the complaints. In March 2001, she claimed she lost $1.1 million under her grandson's watch. According to the complaint, she alleged he exercised discretion, mismanaged and churned her account. She was awarded $400,000 by an arbitration panel in September 2002. All told, Merrill has paid $3.78 million to settle arbitrations; Jaffe has paid $179,600 out of his own pocket, according to the CRD.
So why would a company with GunnAllen's ambitions take on such a seeming liability? Why would the company operate with 30 or 40 reps under enhanced supervision? “We'd like that number to be zero, of course,” says Richard Nummi, former chief compliance officer at GunnAllen, who is now the firm's corporate counsel. In the case of Jaffe, the size of his book would seem to be a factor in keeping him around. Jaffe would not disclose his assets under management, but says it is significantly more than $300 million (his book's value in 1999 when Registered Rep. profiled him).
But Frueh denies that, and says Jaffe was a special exception. “I've known Marc and his family for 20 years,” says Frueh of his fellow Tampa native, “and I knew he was a good person,” he says. But he also says there was “nothing in Jaffe's file that disturbed us” and points out at the firm has had no problems or complaints regarding Jaffe since he arrived. The fact that he was able to bring the majority of his book from Morgan Stanley, executives say, is further evidence that he is not a problem broker.
Jaffe, in defense of his record, says the timing of his exit from Merrill — when the market was unraveling — didn't make for a happy goodbye from the firm. “A lot of people wanted to keep my business,” says Jaffe. While he declined to elaborate, published reports have said Merrill encouraged clients to file complaints against him when he left — a claim Merrill has vehemently denied. “Marc Jaffe is not a bad broker,” says Jaffe. “I'm very passionate about what I do and I work harder than anybody for my clients. But when someone decides to go after you, there's a pile-on effect.”
Nummi and Frueh say the company can take on Jaffe and others that would be considered problem brokers elsewhere because GunnAllen has invested an inordinate amount of money and personnel in compliance and supervision. “We watch all of our reps — every email, every trade, every bit of their activity is under surveillance,” he says. “We can see everything they do.” In other words, no matter what a rep has done in the past (whether it was nefarious or just careless), he or she is unlikely to get away with doing it again.
According to Frueh, the firm spent $4 million last year on “hard compliance costs,” including the installation of FrontBridge, an email archiving and monitoring software package, compliance examinations and new personnel. All GunnAllen branches are subject to surprise examinations annually, and some receive more than one visit, says Nummi. “We want to know our reps like they know their clients,” Frueh says. Exams typically take 36 hours and include picking through 35 percent to 40 percent of client files opened in the last year, checking for anything out of the ordinary or inappropriate, he says. The firm also employs 48 compliance personnel, which is nearly three times as many as at Commonwealth Financial, which has 1,028 reps, and equal to the number at Securities America, a much larger firm with 1,613 reps.
So far however, the beefed up surveillance and compliance system is not foolproof. Take the case of Shawn Aaron. The Tampa-based rep joined GunnAllen in 2000 and this June was charged by the NASD with attempting to extort and intimidate Nasdaq SmallCap company Optelecom. Aaron, who was let go by the firm in August, has contested the charges and is awaiting his hearing. The NASD is seeking to have Aaron permanently barred from the industry.
Nummi and Frueh say Aaron, who has “faithfully served his clients for 10 years,” will be welcomed back at the firm if he is found innocent of the charges. While he had no customer complaints when he was hired, Aaron had been prohibited from selling securities for 25 years in the state of Massachusetts in 1998. Aaron, and several fellow reps at Brauer & Associates (including another future GunnAllen rep) in St. Petersberg, Fla., settled the charges that they sold unregistered securities in the state by withdrawing their Massachusetts registrations.
One prominent New York securities attorney, who wished not to be identified, says the bottom line is that there will always be good reps working at bad firms and bad reps working at good firms. “But if GunnAllen is the latter of those cases, and I think it is, and the firm is sincerely trying to make good on a checkered past, only hiring high-quality people, and it can demonstrate that to the NASD, it should be given a chance.”
Some very recent and significant additions and subtractions at the firm would suggest the firm has decided it's time to clean house. National sales manager Dave McCoy, who was hired in 2002 as the chief operating officer, was fired in August for what Frueh says was “behavior unbecoming an officer.” (Executives Frueh and Nummi would not comment any further in regard to McCoy because the firm has filed a civil suit against him in Florida seeking the return of a promissory note and his share of the firm's stock. According to that complaint McCoy was fired for engaging in “extremely inappropriate conduct, which was potentially unlawful and certainly placed the firm at risk.”)
According to a report in Investment News, McCoy was instrumental in the firm's rapid growth, and helped bring in many of reps “with blemishes on their records.” The Investment News report also noted that 65 reps were “axed,” including 10 of those under “heightened supervision.”
Frueh says “axed” is an inaccurate characterization, and that the pruning took place over a few months and that a majority of the reps resigned or were dismissed primarily for low production. “It was all part of the normal evaluation process of our reps,” he says. “A guy producing $60,000 or $80,000 per year — is he worth the risk when you can replace him with a guy producing $150,000 to $300,000 per year?” Frueh says the firm is weighing risk versus reward with all its reps as it strives to move upmarket and bring aboard higher caliber reps. Meanwhile, the firm has also made some recent key additions at the top, including Declan O'Beirne, hired in July as the new CFO; and, Marc Ellis, a respected industry attorney, who was hired in August as chief compliance officer, taking over for Rick Nummi, who became corporate counsel.
Frueh doesn't like the house-cleaning analogy, but he accepts the positive associations. “The ‘old’ GunnAllen and the ‘new’ GunnAllen — if you wanted to look at it like that, yeah OK, that's more accurate,” he says. “Our core values have always been there, but given what's occurred, it makes sense for us to raise the bar. And keep raising it.”
Top 25 Independent Broker/Dealers by Revenue (2004)
|1. Linsco/Private Ledger||San Diego||$1.137 million|
|2. AIG Advisor Group||Multiple locations||$870 million|
|3. Raymond James Financial||St. Petersburg, Fla.||$763 million|
|4. ING Advisors Network||Multiple locations||$711 million|
|5. NFP Securities||Austin, Texas||$661 million|
|6. National Planning Holdings||Multiple locations||$408 million|
|7. Lincoln Financial Advisors||Fort Wayne, Ind.||$383.6 million|
|8. Pacific Select Distributors||N/A||$324.6 million|
|9. Securities America||Omaha, Neb.||$305 million|
|10. MML Investors Services||Springfield, Mass.||$272 million|
|11. Commonwealth Financial Network||Waltham, Mass.||$269 million|
|12. Signator Investors||Boston||$166 million|
|13. Walnut Street Securities||St. Louis||$160.5 million|
|14. Woodbury Financial Services||Woodbury, Minn.||$150 million|
|15. Jefferson Pilot Securities||Concord, N.H.||$137.3 million|
|16. Princor Financial Services||Des Moines, Iowa||$134.5 million|
|17. InterSecurities||St. Petersberg, Fla.||$134.08 million|
|18. GunnAllen Financial||Tampa, Fla.||$120 million|
|19. Cambridge Investment Research||Fairfield, Iowa||$105.5 million|
|20. M Holdings Securities||Portland, Ore.||$93.17 million|
|21. brokersXpress||Chicago||$93.07 million|
|22. Cadaret Grant & Co.||Syracuse, N.Y.||$86.99 million|
|23. Tower Square Securities||Hartford, Conn.||$82.2 million|
|24. J.P. Turner & Co.||Atlanta||$78 million|
|25. Ameritas Investment Corp.||Lincoln, Neb.||$72 million|
|Source: Investment News|