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How the SEC let an advisor about to be barred sell his firm to a buyer with red flags

An advisor accused by the SEC of defrauding investors and eventually barred from the industry was allowed by the agency to choose the buyer of his firm, selecting an acquirer whose founder has a history of client complaints and large settlements to manage hundreds of millions of dollars for his remaining clients.

Despite alleging in July that Kristofor Behn, 42, and his firm, Fieldstone Financial Management, had defrauded clients -- partly in conjunction with a firm targeted by the SEC for operating a Ponzi scheme -- the SEC allowed Behn to arrange for the sale of his firm. Fieldstone, which reported $235 million in assets under management in early 2018, was sold in February to FourStar Wealth Advisors of Chicago -- without reference to Fieldstone’s yet-to-be-disclosed troubles. Terms of the transaction were not disclosed.

In July, the commission ordered Behn to pay $1.3 million in disgorgement and penalties, a cost he’d likely be in a better position to handle after selling his firm, and barred him from the industry permanently. He now bills himself online as a mergers and acquisitions expert and CEO and founder of WMO Financial Wellness Benefit Program, which says it serves employers and retirement plan brokers. The website does not state where the firm is based and if it is subject to any regulatory authority.

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“This is all problematic,” says Samuel Edwards, president-elect of the Public Investors Arbitration Bar Association. “Even if the guy is truly out of business [as a financial advisor], we need to make sure investors are not getting cheated.”

The SEC alleged that while Behn was at Fieldstone in April 2017, he persuaded a client to invest $1 million in his RIA. Within 10 days of receiving that sum, he used $500,000 to pay personal taxes, satisfy other debts and cover personal expenses, according to the SEC complaint. The commission issued a cease-and-desist order to stop Behn from further harming clients two months ago. He agreed to settle the case, without admitting or denying the allegations against him. He did not respond to multiple attempts to reach him for comment.

Behn had a profile on the Institute for the Fiduciary Standard’s website, one of only 30 such listings, stating his commitment to client-first care: “When I started in this business more than 20 years ago, I did so to make an indelible positive mark on the industry.” The institute “doesn’t hold itself out as a police enforcement mechanism,” says its president, Knut Rostad, “so we are reliant on the regulators to do that piece of it.”

Behn also put a total of $7 million from 40 of his clients into Aequitas Capital Management, which the commission targeted in 2016 for operating a Ponzi scheme, according to the complaint. Behn further did not inform his clients that Aequitas had given Fieldstone a $1.5 million loan and a $2 million line of credit.

Even before the SEC went public with its action against Behn, the commission permitted him to continue performing duties related to the sale of Fieldstone, according to the complaint. Behn “is barred … except that during the period from the entry of this order through Aug. 9, 2019, Behn may perform for the asset purchaser … services that are limited to assisting in the orderly transition of Fieldstone’s assets and advisory clients to the asset purchasers.”

Those services included arranging for his firm to be acquired by FourStar with the approval of the SEC, according to Erik Pahlow of Succession Resource Group, an RIA M&A consulting firm in Portland, Oregon, which helped pair the firms.

Pahlow, who says he has participated in 600 to 700 advisory mergers or acquisitions in the last 18 years, estimates that only about 10 have been similar fire sales that involved regulatory oversight.

Pahlow says he does not know if any of the former Fieldstone clients are aware of the long disciplinary record of the owner of FourStar, Brian Kasal. Between 1992 and 2012, Kasal and the brokerages at which he worked were accused of causing a total of $3.64 million in cumulative losses across four cases brought by clients, according to Kasal’s FINRA BrokerCheck record. A total of $1.83 million was paid to clients in either damages or settlements in those instances. During that time Kasal worked, successively, for Lehman Brothers, William Blair and Morgan Stanley and drew client complaints at each one, according to BrokerCheck.

Kasal denies all the clients’ allegations in his comments on those cases on BrokerCheck.

In the biggest case against him, and the only one for which there is an arbitration case record publicly available to view, an 88-year-old woman who had been a commission-only client of William Blair since 1979 accused him of fiduciary breaches. She claimed that, although she never wanted her all-commission account changed, Kasal and his firm put her into an account that was fee and commission and began charging fees in excess of 1.5% and selling her long-held investments without her knowledge. She claimed they also discontinued her paper account statements even though she did not have an email address. Arbitrators awarded her $1.12 million of her claimed $1.7 million in losses.

When reached by phone, Kasal declined to comment on his own disciplinary record, but described his RIA “as a top-ranked firm [that] has had no blemishes whatever. We are going to do a great job for the clients,” he added.

Studies by FINRA and research by academics have demonstrated that brokers and independent advisors with red flags are more likely to engage in misconduct in the future, says Christine Lazaro, director of the securities arbitration clinic at St. John’s University in New York.

“It’s concerns about prior misconduct … indicating the likelihood that there will be future misconduct,” Lazaro says. “It’s the same on the BD and RIA side.”

The SEC’s approval of the sale of Behn’s firm may send a problematic message to the public, she adds. “It’s creating this false sense of security for the clients, who might view that facilitation as a sanction or endorsing the new RIA in some way,” Lazaro says.

Palhow, who began working on the sale of Fieldstone earlier this year, said that not all Fieldstone clients were victims of the alleged fraud.

In such a deal, Pahlow says, “we take the seller’s lead.”

Pahlow said he couldn’t disclose details of the transaction, but described how his firm generally consults on such a sale. The SEC wants to ensure potential buyers are aware of the sale, in part by allowing Pahlow’s firm to get the word out. Disciplinary history is taken into account, he adds.

“Obviously, the buyer better not have issues themselves,” he says. “If it gets too bad, the SEC would say, ‘No thanks,’ and banks would say, ‘No, we are not lending money.’ Otherwise you would not be able to do this deal, period.”

The SEC is in a difficult position, says PIABA’s Edwards, because it wants to recover losses for investors who have been harmed, but doing so places itself in business, at least for the period of time during the sale of the firm, with a target of one of its own cease-and-desist orders.

“I think every regulator fights this battle of, ‘I'd like to shut it down but I can't be accused of interfering with the business,’ ” he says. Edwards says he imagines the SEC thinks, “We’ll take what money we can and use that to effectively compensate the victims,” adding: “’There's definitely some rationale to that.”

But selling to an advisor with a spotty record raises red flags, he adds, and creates additional potential risk for Behn’s former clients.

A spokeswoman for the SEC declined to comment.

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