It's time for Dr. Phillip Frost to resign as non-executive chairman of Ladenburg Thalmann Financial Services Inc., the home of 4,300 retail brokers and financial advisers.
The risk to Ladenburg Thalmann's reputation, as well as to the four independent broker-dealers it controls, is simply too great for Dr. Frost to continue his association with the brokerage.
All brokerage firms are required to have a minimum level of liquid assets, or net capital, to remain in business and meet their financial obligations. A broker-dealer's reputation is almost an intangible sort of net capital; if it is less than sterling, the reputational capital can drain out of the firm, sometimes overnight. Clients get nervous or complain, and advisers start looking around to jump to a new broker-dealer.
That's why Dr. Frost, who owns close to 36% of the company's stock, must go.
Dr. Frost, who has a medical degree, is an octogenerian whose past investments have mostly been in the pharmaceutical arena.
On September 7, the Securities and Exchange Commission charged Dr. Frost and nine other individuals
for allegedly participating in "long-running fraudulent schemes that generated over $27 million from unlawful stock sales and caused significant harm to retail investors who were left holding virtually worthless stock."
The SEC's complaint
illustrates in elaborate detail the efforts that Dr. Frost and his associates allegedly made to pull off the "classic pump-and-dump schemes."
"From 2013 to 2018, a group of prolific South Florida-based microcap fraudsters led by Barry Honig manipulated the share price of the stock of three companies in classic pump-and-dump schemes," the SEC alleges. "Miami biotech billionaire Phillip Frost allegedly participated in two of these three schemes." The companies were not identified by the SEC.
Mr. Honig "allegedly orchestrated the acquisition of large quantities of the issuer's stock at steep discounts, and after securing a substantial ownership interest in the companies, Honig and his associates engaged in illegal promotional activity and manipulative trading to artificially boost each issuer's stock price and to give the stock the appearance of active trading volume," according to the SEC.
Mr. Honig and his associates then dumped their shares into the inflated market, reaping millions of dollars at the expense of unsuspecting investors, the SEC alleges.
Dr. Frost's involvement in the alleged scheme poses tremendous risk to Ladenburg's reputation and brand.
The market clearly believes that there is new risk associated with Ladenburg Thalmann. The company's stock price has cratered since September 7, the day the SEC released its complaint. It opened that day at $3.43 per share before falling 15% for the day.
And the share price has worsened. On Wednesday afternoon, shares were trading at $2.35, down 31.5% since the SEC's complaint.
Ladenburg Thalmann is one of the leading networks of independent broker-dealers. Its B-Ds include Securities America Inc., Triad Advisors, Investacorp Inc. and Securities Service Network Inc.
"The controversy is likely to lead to further fundamental deterioration; financial firms are sensitive to reputational risks,"
according to a post published Tuesday on Seeking Alpha, whose author, Hindenburg Investment Research, is a short seller of Ladenburg Thalmann shares. That means that aptly titled Hindenburg is betting the price of those shares will go down. "Plus, the worst may not be over; signs point toward possible criminal charges."
"We think Phil Frost should resign to avoid more reputational damage to the firm," according to the article. "As the investigation and enforcement process continues forward, it is almost assured to create more negative headlines and spook clients."
The Seeking Alpha post also details the amount of leverage on Ladenburg Thalmann's balance sheet and the drag that could present for shareholders.
Hindenburg Investment Research is led by Nate Anderson, who describes himself as performing hedge fund due diligence and marketing in his profile on Twitter.
Other analysts, including those on Seeking Alpha, have had kinder outlooks on Ladenburg Thalmann in the wake of the SEC's allegations about Dr. Frost.
"If you are convinced that the issues with [Dr. Frost] are not life threatening, (and I do not believe they are), then the baby bonds are definitely worth a look," wrote a firm called Rubicon Associates
in another Seeking Alpha post. "Of these, I favor the Ladenburg Thalmann 7.25% notes due 9/30/2028."
Others were also sanguine about Ladenburg's future.
"It is important to note for Ladenburg shareholders that Dr. Frost serves as a non-executive member of the board of directors and does not hold any operational executive position at the company and that, as noted in previously published reports, Ladenburg's business is robust and its financial position is strong, with $390 million in book value and nearly $250 million in cash," wrote Alexander Paris, an analyst with Barrington Research, an investment bank that has done business with Ladenburg Thalmann in the past year.
"This opinion piece was published by investors disseminating misleading information to push their own agenda, and we categorically reject its wrongheaded conclusions with respect to Ladenburg's financial strength and stability," wrote Ladenburg CEO Richard Lampen in a message to InvestmentNews. "Ladenburg continues to be one of the most well-capitalized and well-resourced firms in the independent financial services industry."
A spokesman for Dr. Frost, Jamie Tully, did not respond to questions about the future of Dr. Frost at Ladenburg. But in a statement, Dr. Frost wrote: "Nothing is more important to me than my integrity and I am deeply proud of the role I have played over many decades in developing medicines and diagnostic tools that have improved many lives. I intend to fight the charges that have been brought against me and will fight to clear my name."
Was the Seeking Alpha post by Hindenburg an example of a short seller trying to take advantage of negative news about a company? It could very well be.
What is clear is that Ladenburg Thalmann's reputation must be protected, for the benefit of its advisers and their clients. That means Dr. Frost should leave the company as soon as possible.
