Waddell & Reed Financial has found itself at the wrong end of a $27.6 million NASD artibration judgement. The firm was harshly criticized for intentionally slandering the reputation of Steven Sawtelle, a former representative, who was fired immediately after testifying to the Security and Exchange Commission regarding another Waddell & Reed employee. Waddell & Reed is planning to appeal the decision.

The NASD panel found: ‘the firm demonstrated reprehensible conduct that warrants an award of punitive damages.’

The panel found that after Sawtelle was fired, Waddell & Reed orchestrated a campaign to slander Sawtelle’s reputation by giving clients the impression that Sawtelle mishandled their investments, was untrustworthy, no longer in business and not authorized to do business. The panel also found that the firm had indicated to Sawtelle’s clients that he was in some way involved with embezzling their funds.’

While Sawtelle was overjoyed at the panel’s findings and award, he was careful to avoid denouncing the firm as a whole.

‘It is very sad because there are a lot of good people at that company, but because of senior management and outside counsel, it’s tarnished them,’ said Sawtelle. ‘I’ve had 40-plus calls from Waddell & Reed people congratulating me.’

Supportive ex-coworkers were not the only Waddell & Reed veterans calling Sawtelle.

‘I had over 27 calls yesterday where I heard from people who had similar experiences,’ he said. ‘You’re going to see a lot more cases coming up.’

Sawtelle said he feels vindicated by the panel’s decision. ‘(Waddell & Reed) took four years of my life. They took 17 year of a business I built up as a number one producer.’

The Case

According to Sawtelle, while he was a division manager, he twice recommended the termination of David Stevenson, a rep he supervised until the end of 1993. ‘In both cases, senior management overrode my recommendations,’ said Sawtelle.

In August of 1996, Sawtelle was subpoenaed to testify in an SEC case that alleged that Stevenson had embezzled $2 million over a period of two years.

‘I went to the SEC and told them that it was on record that this guy should have been terminated twice,’ said Sawtelle. ‘Outside counsel met with my attorneys and said, "He should be careful what he says."’

When Waddell & Reed lawyers requested that he release transcripts of the hearings, Sawtelle agreed. Two days later, he was terminated.

The same day he was terminated, Sawtelle’s clients received a letter stating that he was no longer with the firm and warning that moving their funds from Waddell & Reed could incur tax and early withdrawal penalties. Furthermore, the Overland Park, Kansas-based firm hired a telemarketing firm to call Sawtelle’s clients and keep them from moving their assets.

‘They hired some kind of firm to call these people that knew absolutely nothing but they said, we’re going to take care of your money, but you’d ask them a question and they couldn’t answer it because they were telemarketers,’ said Dennis LaFrance, a longtime client of Sawtelle’s.

LaFrance and his wife, Linda, left Waddell & Reed to stay with Sawtelle, but the firm did not make the transition easy. The couple was in the process of moving assets out of Waddell & Reed mutual funds gradually, in order to avoid back-end penalties, when their assets suddenly fell off the radar screen. Their representative had moved the entire sum into OppenheimerFunds mutual funds, racking up considerable fees. Despite numerous calls, the LaFrances were never reimbursed for this unintended cost, LaFrance said.

Ultimately, Sawtelle retained 2,600 of the 2,800 accounts he had at Waddell & Reed and continues to operate his business through Wyomissing, Pennsylvania-based Hackett Associates.

A Waddell & Reed representative was unavailable for comment prior to publication time.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.