New ownership for BD after questions over biotech links

A majority stake in the parent company of a broker-dealer with 700 advisors is changing hands — for exactly the same price as a little more than two years ago.

B. Riley Financial agreed to pay Fortress Biotech $22.9 million in a two-part transaction for its 56.1% interest in New York-based National Holdings, according to Chairman Bryant Riley, who calls the price attractive. National’s recent overhaul also made it a good opportunity, he says.

B. Riley closed the initial part of the deal on Nov. 16, paying about $9.8 million for a 24% stake, with the rest slated for closing upon FINRA approval, according to an SEC filing by National. B. Riley agreed to purchase more than 7 million shares from Fortress at $3.25 apiece, roughly the value of National’s stock.

CEO Michael Mullen, who took over National in January 2017 after decades of working as an advisor, says he has let go of 300 representatives with too many disclosures or otherwise didn’t fit into the cultural change. The firm is also now mixing in more advisory services with its traditional brokerage clientele.

The relationship between National and Fortress wasn’t “properly understood or appreciated,” Mullen says, citing a news report from August on conflicts of interest in representatives’ sales of Fortress-related biotech offerings to clients. National later issued a long statement rebutting the article.

The discussions with Riley — a onetime member of National’s board — ramped up after Reuters published the story, Mullen says. B. Riley, which also purchased the regional BD Wunderlich Securities for $67 million last year, will have observer rights rather than a voting seat on National’s board, Riley notes.

“There’s a sense of urgency and a sense of management that I think Mike has brought to the table that I’ve been really impressed with,” says Riley. “We have a wealth management business. We don’t own 100% of National. I think it would be inappropriate at this time to be on that board.”

Riley left National’s board in 2012 after only six months, he adds, because the company wasn’t making changes he believed it needed in real estate, management compensation and overhead costs. He praises Mullen for being “thoughtful around cleaning up the brokers a bit and trying to upgrade.”

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About 650 of the firm’s advisors operate as independent contractors. The rest are employee brokers. National produced $189.9 million in revenue last year for a five-year high. Client assets have expanded by 60% to $12 billion since Fortress closed on the stake in September 2016, Mullen says.

“Bryant and the team recognize the value of the hard work that we have done these past two years,” he says. “It’s a great vote of confidence that we’re not going to let them down on, that’s for certain.”

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In an interview earlier this year, Mullen said the firm “had to solidify the foundation, maybe reinforce some of the structural supports” for risk management, supervision, surveillance and compliance. The firm began assessing every registered representative shortly after Fortress took the stake, he said.

Mullen approached his “lifelong friends” Lindsay Rosenwald and Michael Weiss of Fortress when he and other advisors at National Securities became frustrated over their lack of input with management amid several unsolicited acquisition attempts, Mullen says.

“It was very frustrating to me that the management of the firm never even asked us what we wanted,” he says. “And, in my frustration, I started talking to my friends who happened to be the other top advisors in the firm. I found that they felt the same way.”

Rosenwald and Weiss agreed to pick up the stake, according to Mullen — but only if he gave up his New York-based practice to lead the parent firm.

The Reuters investigation questioned whether National analysts had properly disclosed links between Fortress and firms they were covering, along with how much National’s retail clients understood their more than $240 million in investments into high-risk biotech firms and startups related to Fortress.

National responded at the time that Fortress-related sales amounted to only 5% of its revenue since it became the majority shareholder. National’s investment banking and due diligence had also “rigorously vetted” the securities, according to the firm.

Fortress issued an announcement on the deal to sell its stake in National to B. Riley, but the firm declined to comment. Regulators have not sanctioned Fortress or National over any aspects of the ownership structure or the clients’ investments.

B. Riley agreed to a three-year “standstill” where it won’t increase its position in National after the deal closes, and Mullen says Riley wants to make use of transfer rights in the contract to keep his company’s stake below 50%.

The Los Angeles-based firm’s other deals in recent years include buying a 30% stake in women’s clothing retailer Bebe, full positions in online services firms United Online and magicJack VocalTec and acquiring capital markets firm FBR & Co. B. Riley has also folded Wunderlich into B. Riley Wealth Management.

“We agreed to terms that allow [Mullen] to run the business the way he thinks it should be managed,” Riley says of the National deal. “We thought the price was attractive, and we thought it was opportunistic.”