Fourteen top advisers for Cambridge Investment Research Inc. have left the firm in the past year in a dispute with management over a partnership program designed to provide them with capital for succession planning and acquisitions, but which one of the advisers allegedly called a Ponzi scheme.
A sister firm to Cambridge — Continuity Partners Group — filed an arbitration claim in June with the Financial Industry Regulatory Authority Inc. against five of the advisers, claiming their actions have contributed to a loss of more than $16 million in the program.
The advisers last month filed a counterclaim in U.S. District Court in Idaho, alleging the partnership owes them close to $2.5 million in damages, plus interest and attorney fees.
Cambridge owner and founder Eric Schwartz launched
Continuity Partners Group, a broker-dealer and registered investment adviser, in 2010 as a way to provide capital for succession planning and acquisitions to affiliated advisers.
The program was designed for advisers who produce at least $1 million annually in fees and commissions, according to court documents.
In exchange for units of the partnership, each adviser contributes or assigns to Continuity Partners certain assets, including the right to a percentage of the adviser's practice, according to court documents. The number of partnership units issued to an adviser derives from the value of the assets contributed by the adviser to Continuity Partners, according to court documents. According to court documents, 170 advisers have invested in Continuity Partners Group.
The disagreement between the advisers and Continuity Partners flared up last year. In a meeting of 80 Continuity Partners members in August last year, one adviser suing the firm, Dave Petso, made “false and misleading statements,” including “a description of [Continuity Partners'] growth and increased valuation derived by bringing in new members as a Ponzi scheme,” according to the Continuity Partners arbitration claim.
The advisers' intent was to injure Continuity Partners' “business reputation in the community” by suggesting or implying that the partnership “misrepresented itself, defrauded members, provided illusory benefits, and/or has been negligent or incompetent,” according to the arbitration claim.
When asked about the alleged claim that he called the partnership a Ponzi scheme, Mr. Petso said that was “not accurate.” He declined to comment about what he said in the meeting.
“We filed our lawsuit simply to get money back,” Mr. Petso said. He declined to comment any further.
According to the
advisers' lawsuit, Mr. Schwartz and other Cambridge top executives “fraudulently induced” the five advisers to invest $2.5 million in the partnership by assigning it a percentage of the revenues generated by the advisers.
Mr. Schwartz and other Cambridge senior executives promised the five advisers and other Cambridge reps that joining the partnership would “'enhance the value of their practices and…(enable them to) transition… their businesses' to prospective buyers,” according to the complaint.
The advisers “would receive profit sharing, appreciated growth, and liquidity with no significant exit charges aside from minimal administrative fees,” according to their complaint.
That was not the case, the advisers' lawsuit alleges. The advisers learned that Mr. Schwartz and other executives “were self-dealing and failing to invest [the advisers'] assets as promised – leaving no meaningful liquid profits for distribution to the [advisers], yet exposing [the advisers] to unfavorable tax reporting obligations, and loss of use and liquidity of invested funds,” according to the complaint.
Continuity Partners, Mr. Schwartz and other executives “employed manipulative and deceptive investment practices in order to defraud and deceive [the advisers], and to induce [the advisers] to purchase stock and other securities,” according to the complaint.
“We strongly deny the allegations contained in their complaint,” said Cindy Schaus, a spokeswoman for Cambridge.
“As is evident from the statement of claim that Continuity Partners previously filed in arbitration, the parties have a dispute about their respective rights and obligations with respect to each other,” she said. “And we believe that this matter should be resolved by a panel of arbitrators appointed by Finra.”
