A tale of two PPP loans

The Paycheck Protection Program appears to have been a boon to small broker-dealers -- those with about 150 or less retail-focused reps and advisers -- and to middle-sized firms with 500 or fewer advisers.

The loan program could cover a firm's salary for a month or two and was aimed at buoying businesses with less than 500 employees; loans were to be used to protect employees' salaries during the pandemic.

Plenty of small and mid-sized broker-dealers took the government-guaranteed loan money aimed at helping small businesses. Large firms were too big to apply.

I have no issues with firms taking these loans if the money was to be used appropriately to aid employees during an unprecedented crisis. Whether or not broker-dealers needed the money to keep their doors open is another question.

My colleague Jeff Benjamin raised this issue regarding registered investment advisers lining up for taxpayer money back in the spring, when PPP was first unveiled as part of a $3 trillion federal stimulus package to boost the economy during the height of the deadly COVID-19 outbreaks.

Was it appropriate for RIAs, which rely heavily on technology and charge fees in the range of 1% of clients' assets, to take money that was designed to help small businesses that use workers who can't work from home, like a local, beloved Mom and Pop restaurant or bakery?

Broker-dealers who took the PPP payment, in the form of a forgivable loan, were in a similar boat.

Like RIAs, broker-dealers charge fees on some client accounts; they also rely heavily on charging commissions on client transactions. Brokerage executives I have spoken to since the pandemic hit the U.S. in March have said that the trading has been particularly heavy as clients move in and out of positions, often seeking safety in cash or bonds.

That means that the cash registers were ringing at small and mid-sized firms as they filled out their applications for the PPP program.

The loans were meant to cover two months or so of salary; to my mind, it would be almost impossible for a broker-dealer owner or senior officer to turn down the chance to apply for and receive such funds, particularly as the brokerage industry continues to see small firms close or be acquired by giants such as LPL Financial and Advisor Group.

In other words, how could a broker-dealer ignore free government money, which taxpayers will have to pay back at some time down the road?

It's also hard not to see the irony of the situation. The overwhelming majority of senior brokerage executives lean toward a politically conservative world view that preaches small government and less regulation. Federal bailouts are supposed to be anathema to such citizens.

Data released Monday by the Small Business Administration revealed that at least seven small to mid-sized broker-dealers routinely covered by InvestmentNews took the loans.

Among them were: American Portfolios Holdings Inc., the owner of American Portfolios Financial Services Inc., which received between $1 million and $2 million; Kovack Securities Inc., $350,000 to $1 million; and Geneos Wealth Management Inc., also $350,000 to $1 million.

"My responsibility is to protect my employees so they can serve the brokers and advisers," said Lon Dolber, CEO and owner of American Portfolios.

He said that the huge unknowns facing the economy led him to apply for the loans, and he wound up hiring more employees and had staff working on weekends. "I took the opportunity to have that safety net," he explained.

Senior executives at Kovack and Geneos did not return calls on Wednesday to comment.

Two more firms were Centaurus Financial Inc. and Berthel Fisher & Co., which both received $350,000 to $1 million in stimulus, respectively.

Senior executives from those firms also did not return calls Wednesday seeking comment.

But perhaps the two most interesting broker-dealers to get PPP money are Newbridge Securities Corp., which recently revealed it ran a $9 million deficit last year, and Ascendant Alternative Strategies, which has close ties to money manager GPB Capital Holdings, the private placement manager that is facing multiple investigations and investor complaints and also received PPP money.

Newbridge received $1 million to $2 million, while Ascendant Alternative Strategies got $150,000 to $350,000 of PPP money.

Senior executives with those firms also did not return calls on Wednesday.

The owner of GPB Capital is David Gentile, who is the co-owner of Ascendant Alternative, along with Jeff Schneider. Ascendant Alternative was the lead distributor of GPB private placements, which have no audited financial statements and haven't regularly paid investors distributions for almost two years. GPB is essentially dead in the water.

Will the taxpayer's PPP money help staunch the bleeding at Newbridge? Will Ascendant Alternative use its PPP cash to help investors who have seen the value of GPB private placements plummet?

As noted above, broker-dealers, like RIAs, generated plenty of revenues in March, April and May. Broker-dealers have billed their clients for the quarter, so these firms caught a huge break; it's clear that the PPP money was intended for other types of businesses -- those that stopped functioning.

Yet, it would be foolhardy for any type of business to turn down Uncle Sam's free cash. But it would be worse if that money and the opportunity it created to help broker-dealer employees or clients was squandered.

The care that Lon Dolber of American Portfolios showed for his workers should serve as an example for any business owner who took a PPP loan.