The defection of over 30 Waddell & Reed advisors in the New York and Connecticut region to Washington Square Securities (WSSI), an ING affiliate, has driven a wedge between the firms.
Waddell has notified ING that it is ending a third-party selling agreement with WSSI in response to its involvement with the defection. "It’s not in our firm’s best interest to cancel an agreement, but these third-party agreements are based on trust," said Mark Buyle, a lawyer for Waddell. "Based on Washington Square’s conduct and their active participating and encouraging of advisors to leave, we couldn’t continue with that relationship." ING declined to comment.
According to Buyle, the selling agreement allowed WSSI advisors to sell "non-retail" shares of Waddell’s W&R Funds. By revoking access to these funds, Waddell will inflict some pain on departing brokers, says one of them, Frank Adams. "They’ve torn up a selling arrangement to spite me," he says. "But they’ve done it at the clients’ cost."
The departing brokers have formed a new firm called Capital Financial Planning. (The firm will use Washington Square as its broker/dealer).
Based in Latham, N.Y. and founded by former Waddell division manager Todd Slingerland, Capital Financial has pulled 34 advisors from Waddell to date, and Slingerland expects that number to rise to 50.
Waddell is appealing the dissolution of a temporary restraining order that would prevent more advisors from leaving for Capital Financial. The restraining order had been in place for nearly a month, but was overturned last week, Slingerland says.
Waddell’s original complaint, filed in New York State Supreme Court April 8, accuses Slingerland and another former Waddell district manager, David Ross, of masterminding the advisor defections from offices in Albany, Saratoga, Mohawk and Melville, N.Y., as well as from offices in North Haven and Hartford, Conn.
Waddell’s complaint says Slingerland held "regular weekly meetings" during business hours at the Albany office in which he "urged the advisors to leave Waddell & Reed and join CFP." The complaint further accuses Slingerland and Ross of misappropriating proprietary Waddell information, including client lists.
Buyle says Slingerland was confronted about plans to leave Waddell in late 2002. "We received warning signs that he was leaving," says Buyle. (Slingerland contends WSSI started recruiting him in January 2003.) In March Slingerland was suspended, and clients at Waddell's Albany, N.Y. office, which Slingerland managed, pulled $3.6 million in investments from the firm. In April Slingerland was fired.
The appeal on the TRO, says Buyle, will be reviewed on Wednesday, May 21. Waddell has also filed a separate action through the NASD, again naming Slingerland, Ross and WSSI. Buyle says the amount in damages Waddell will seek has yet to be determined, but did say it would be in the millions. Slingerland says Waddell is seeking $140 million. Arbitration dates, says Slingerland, are set for February of 2004.
Last week, those advisors who had left discovered that Waddell was no longer allowing block transfers of funds, the advisors claim. As a result, clients who want to move with their advisors to Capital Financial must each request a transfer of funds from Waddell. Buyle indicated that Waddell did not feel comfortable making the block trades, because they did not require clients’ approval. "If clients want to transfer, they can contact us and we would honor that immediately," says Buyle.