Does Fired LPL Broker Pose Risk to New B-D?
Wunderlich Securities plans to double its number of advisors -- but "it's going to be done with the right people," CEO Gary Wunderlich said two weeks ago.
It turns out, though, that one of the broker-dealer's new hires is a former top LPL Financial broker whom LPL says committed violations including borrowing client money and selling investments without the permission of his broker-dealer -- a practice known as "selling away."
LPL says it "discharged" James "Jeb" Bashaw for the alleged wrongdoings last month. The giant IBD declined to answer questions about Bashaw, but its allegations are recorded in the report in the Central Registration Depository maintained by FINRA.
LPL's CRD statement says that Bashaw was "discharged for (a) participating in private securities transactions without providing written disclosure to and obtaining written approval from the firm, (b) borrowing from client, and (c) engaging in a business transaction that created a potential conflict of interest without providing writte disclosure to and obtaining written approval from the firm."
The SEC lists Bashaw as registered with Wunderlich as of Sept. 29 of this year, and his website redirects to a "Bashaw Group" page on Wunderlich's website. But a spokeswoman for Memphis-based Wunderlich, Kathy Ridley, says Bashaw has not started working for his new B-D yet. She explains that his license has not yet transferred to the firm, and says the delay is likely due to FINRA's review of the case.
Bashaw did not respond to requests for comment, but he wrote in a short explanation in the CRD report, "I am home office-supervised and have had 13 perfect audits. I am still unclear as to specifics" regarding his termination.
A FINRA spokeswoman declined to discuss the case.
ASSETS VS. REPUTATION
Bashaw was the founder of an eponymous dually registered firm in Houston, which was one of LPL's largest affiliated practices, with $3.8 billion in assets under management in 2011. That year, Barron's named Bashaw he No. 1 advisor in Texas, citing his self-described "conservative but agile" approach to investing.
But it's unknown how many assets Bashaw might bring to Wunderlich. While three members of his former 20-person team have already moved to Wunderlich, the remainder are still with LPL, Ridley says.
And bringing Bashaw on could create a liability for Wunderlich, say outsiders.
"The firm who takes on somebody like that, of course, faces an enormous reputational risk," says compliance lawyer Bettina Ekerle, of Ekerle Law in Manhattan and former general counsel of Focus Financial. "We talk a lot about the role of the advisor as a fiduciary. If there is anything that makes someone look like they aren't a straight shooter, then it is huge."
The circumstances of Bashaw's move "may matter to clients," says Houston-based Courtney Raymond, who recruits advisors for firms. Wunderlich declined to respond to a question about Bashaw's reputation.
Bashaw has also become a magnet for lawsuits.
Andrew Stoltmann, a securities lawyer in Chicago, says that after one of Bashaw's clients contacted him, he is actively hunting for more Bashaw clients -- as are several other firms, he notes.
"These are fun, cool cases from a lawyer's perspective," Stoltmann says.
Selling away is when individual brokers cut their B-Ds out of the sale of an investment product -- pocketing the B-D's commission but also avoiding the company's research and compliance review processes, Stoltmann says.
"More often than not, there are glaring red flags that should have alerted the firm to the fraud," Stoltmann says. "All these cases come down to liability and damages. You have very clear liability in 'selling away' cases and very clear damages."
"Brokers never do [selling away] to one or two clients," he adds. "They tend to do it to five, 15, 50 or even 100. We'll traditionally represent big groups of those clients."
Given Bashaw's potential liability, Ekerle -- who emphasizes that she is not familiar with the particulars of the case -- says she would expect Wunderlich to have thoroughly investigated him before hiring him.
But the CEO of another independent B-D, who asked to remain anonymous, said that in the wake of the split with LPL, the evidence in Bashaw's favor would have to be compelling.
"I don't think anyone in this firm would be in favor of bringing on a person [in this situation] unless we saw an abundance of information that made us think that the previous firm got it wrong," the CEO says.
Bashaw has two other disciplinary cases on his BrokerCheck report: one that was settled for $20,804 in 2012 and another from 1990 that was settled for $200,000.
Wunderlich, meanwhile, has been on an aggressive growth tear.
In December, the broker-dealer raised $40 million in capital from in an investment led by Altamont Capital Partners, a San Francisco-based private investment firm, and members of his company's own management team.
Wunderlich on Oct. 1 agreed to buy dually registered firm Dominick & Dominick, a brokerage founded in 1870 with its own recent disciplinary action.
If completed, the Dominick & Dominick deal would bring Wunderlich's AUM to $10 billion and the number of its advisors to 250 in 32 offices nationwide.
Dominick & Dominick in July agreed to pay $222,606 in fines, interest and disgorgement to FINRA for a series of fiduciary breaches involving commissions and fees charged to its advisory clients; in total, the firm has 20 disciplinary actions reported on its BrokerCheck report, although the list stretches back to 1970.
Dominick & Dominick's CEO, Kevin McKay is slated to become general counsel of Wunderlich once the acquisition closes early next year. McKay did not return calls requesting comment.
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