NEW YORK — Another independent broker-dealer has shut its doors, months after one of its brokers got in trouble with regulators.
NEW YORK — Another independent broker-dealer has shut its doors, months after one of its brokers got in trouble with regulators.
Legacy Financial Services Inc. of Petaluma, Calif., in July quietly sold the majority of its affiliated registered representatives, and their accounts, to Multi-Financial Securities Corp. of Denver. Details of the transaction were made public last month in a filing with regulators.
Multi-Financial transferred about 125 advisers with nearly $10 million in gross dealer concession from Legacy Financial, said Patrick McEvoy, Multi-Financial’s president and chief executive.
Brecek & Young Advisors Inc. of Folsom, Calif., also acquired some advisers, as well as executives from Legacy, according to an industry recruiter, who asked not to be identified.
Chris Ranney, Brecek & Young’s chief executive, was not available last week to comment.
Meanwhile, Legacy Financial continues to face allegations in an “order to show cause” from the Maryland Securities Division that it failed to supervise a former affiliated registered rep.
Brokers run afoul
The rep and longtime insurance agent Joseph Karsner ran afoul of regulators in March.
Mr. Karsner recommended “unsuitable” mutual funds that invested in risky stocks and were concentrated in small- and mid-cap stocks, and technology shares, according to the March order, filed by Maryland Securities Commissioner Melanie Lubin.
The sale of Legacy Financial’s brokers was not related to Mr. Karsner’s case, said executives from the firm. Instead, it was due to Legacy’s inability to keep up with competition, they said.
Legacy was “not getting reps in as much as we hoped,” said Robert Pitts, the firm’s president.
The firm maintains that it bears no culpability in the case involving Mr. Karsner.
“We supervised him appropriately,” said Larry Qvistgaard, a vice president at Legacy. “We’re standing behind that.”
Legacy Financial had about 155 affiliated reps before it started its sell-off.
The firm is the second midsize independent broker-dealer based in California to recently shut down.
In June, Brookstreet Securities Corp. of Irvine, Calif., which has $70 million in gross revenue, imploded after it couldn’t meet margin calls on risky securities linked to interest rate changes, called collateralized mortgage obligations.
The two cases highlight the dangers and difficulties of operating a firm without deep pockets, one industry observer said.
“It’s very, very difficult to compete in this environment,” said Larry Papike, president of Cross-Search, a recruiting firm in Jamul, Calif.
One issue is the cost of recruiting, he said. Another is that broker-dealers “get scared to death. They can’t deal with any hiccups,” such as a broker’s being sued by regulators, Mr. Papike added.
Legacy Financial sold its assets to Multi-Financial for 11.5% of the advisers’ fees and commissions from last May to this April, according to an Aug. 20 filing with the Securities and Exchange Commission by Regan Holding Corp., Legacy Financial’s parent company.
Regan Holding primarily creates, markets and administers life insurance and annuity products.
“We expect to use the cash proceeds from this sale to settle outstanding Legacy Financial matters, and the remaining funds will be available for general corporate purposes once the transition process is complete,” the SEC filing said.
Mr. McEvoy, Multi-Financial’s president and chief executive, declined to comment on Legacy Financial.
But acquiring the broker-dealer’s reps, and not the broker-dealer itself, made the deal more palatable, he said.
“When you buy a complete broker-dealer, you buy the liability,” Mr. McEvoy said.
While individual producers also received compensation packages to move to Multi-Financial, the costs involved in the transaction were well below the 30% of gross revenue that has been the historic norm used by the industry in acquisitions, Mr. McEvoy said.
The broker, Mr. Karsner, had about 1,110 clients, many of whom worked for AT&T Inc. of San Antonio and Verizon Communications Inc. of New York, and other telephone companies.
According to the order, he typically advised workers eligible for retirement to take a lump-sum distribution rather than a guaranteed monthly pension, because the lump sum could provide income and growth, according to the order.
Many of Mr. Karsner’s clients lost a substantial or even the entire portion of their retirement portfolios, the order said.
Pot of gold
Mr. Karsner earned more than $3.3 million in commissions between 1999 and 2003, and Legacy paid him a $125,000 signing bonus when he joined the firm, according to the order.
Mr. Karsner did not return calls to his firm, Karsner Tax Advisory Group LLC of Gambrills, Md.
Legacy cut ties with Mr. Karsner in 2006.
He described his business as a “retirement-planning and investment organization that offers a number of investment vehicles to structure a portfolio that will meet your particular financial needs,” according to the Maryland complaint.
