GunnAllen Financial, Inc. Background Information
GunnAllen Financial, Inc., founded in 1986 by Richard Allen Frueh (pronounced “free”) and Jay Gunn, is headquartered in Tampa, Florida. It is a registered securities broker-dealer firm, now licensed to sell securities in all 50 states. The firm operates primarily as a retail securities brokerage firm and claims almost 1,000 registered persons, mostly independent agents, plus over 250 employees, including operation and other support staff.
Unlike full-service brokerage firms, GunnAllen is an “introducing” brokerage firm. Such firms handle sales and execution of orders for their clients, whose accounts are held at a different “clearing” brokerage firm. Its brokers are licensed through GunnAllen, which is responsible for their supervision, but most are independent contractors who maintain their own offices, or operate from their homes, and pay any staff persons as well as their other expenses.
Because the account representative is employed at a different firm, unique problems can occur in accounts handled by introducing brokers. Additional problems can also arise when the representative is an independent contractor rather than an employee of the brokerage firm. When salespersons are not located in an office of a securities firm with an onsite manager, supervision over their activities is also problematic.
Although it is more than 20 years old, GunnAllen has experienced phenomenal growth in recent years. In addition to expanding its sales force by more than four-fold, it recently reported that it manages over $5.4 billion in client assets and that the firm’s annual revenues are more than $136 million. As discussed below, some observers claim GunnAllen’s rapid growth has come through highly aggressive tactics which could cause problems for the firm and its clients.
According to Registered Representative Magazine, GunnAllen Financial, in Tampa, Fla., had been in business for six years and had about 200 brokers and $1.2 billion in assets. Its founders then went “into overdrive,” recruiting producing brokers from other firms willing to move to an independent firm that offered an open architecture and the freedom to run their businesses as they chose.
Three years later, GunnAllen had over 900 reps and $5.8 billion in assets. But along with all that growth, GunnAllen acquired something else — a reputation for hiring a relatively high proportion of reps with reported regulatory problems, and some even with criminal complaints. Soon, almost 5% percent of GunnAllen reps were under “enhanced supervision” because they had three or more marks on their regulatory records. According to the NASD, only 10 percent of the nation’s 660,000 registered representatives have any marks on their record and only 0.6 percent (one in 333) have three reported items.
The number of marked up representatives at GunnAllen — and the notoriety of one of the firm’s top producers, who had a whopping 24 hits on his record — still raised questions. “They’ve hired a lot of shady brokers,” said a recruiter who asks not to be named. “If you’re on the cusp of sloppiness, you could have a place at GunnAllen.” GunnAllen officials denied the inferences and claimed it got a “bum rap” in the article.
GunnAllen Financial Inc., reportedly purchased the brokerage firm MPI for about $250,000, a very small price for a firm with 25 employees, including 17 brokers, and a firm with about $2.5 million in revenues. A firm of this size would normally sell for at least ten times the amount paid by GunnAllen, yet a further look at MPI’s situation could shed light on the low price.
At the time of the sale, MPI was named in a lawsuit filed over its dealings on behalf of West Virginia-based First National Bank of Keystone, which federal regulators shut down in one of the largest bank failures in U.S. history. The suit claimed the brokers conspired with bank insiders to dump Keystone stock after regulators intensified their investigation of the bank. MPI also had financial problems, losing over $350,000 the previous year. MPI was later fined by regulators for falling below its financial “net capital” requirements.
MPI’s owner claimed that neither legal nor financial problems was the reason for the sale, although he admitted that an earlier deal fell through and GunnAllen’s offer was apparently the best available. Meanwhile, GunnAllen officials claimed they were not concerned with problems at MPI’s because GunnAllen did not assume MPI’s liabilities.
A Federal Court in San Francisco ordered GunnAllen Financial, Inc. and its former broker to pay an investor $1.8 million for claims. As part of the award, GunnAllen was ordered to pay the client almost $1.5 million in punitive damages for claims which included “churning” the client’s account for commissions. The broker, who moved then moved to R.M Stark & Company prior to the judgment, was also ordered to pay over $120,000 in punitive damages for his role.
According to court papers, an account was opened at GunnAllen for the investor in February of 2004, with cash and securities totaling $428,000. After only three months the account had been charged commissions of $128,840 (almost one-third of the account value and an annualized rate of more than 100%). By then, the trading losses reached $240,381. Thus, the majority of the losses in the account were apparently caused by the commissions charged. In addition to the punitive damages, the court awarded all of the losses the victim had incurred.
The case drew special attention because, although GunnAllen account agreement called for arbitration of disputes, it offered the client the alternative of filing a claim in The New York Stock Exchange’s arbitration forum. Yet, because GunnAllen was not one of its members, the NYSE refused to go forward with a claim when filed there.
The case was then filed in the San Francisco Federal Court, which refused to order the case to the National Association of Securities Dealers, the other alternative forum stated. (This outcome would not likely happen today because the NASD and NYSE forums have now merged into the Financial Industry Regulatory Authority.) Based on the courts refusal to order the case to the NASD, the court’s final judgment has been appealed.
In a very bazaar case, a stockbroker at GunnAllen Financial, Inc. was fined $50,000 by the NASD for attempting to extort a public company by threatening to drive down the price of its shares more than 50% if officials did not provide him with confidential information. GunnAllen was not charged in the matter.
According to the NASD, GunnAllen broker Sawn Aaron contacted officials at Optelecom NKF, Inc., a Nasdaq SmallCap company, and threatened to drive down the price of that company’s shares from $13 to $6 per share if he was not provided with certain inside information about the company. To bolster his threat, Aaron falsely stated that he had driven down the price of shares of other companies which had not cooperated with him.
On his recommendation, by April of 2004, about 50 of Aaron’s customers had purchased the stock, as had Aaron. Together, Aaron and his customers owned more than 140,000 shares of about 3.15 million total shares outstanding. The NASD charged that he contacted a representative of Optelecom-NKF stating he personally owned or controlled 300,000 shares, about 10 percent of the company’s stock, and threatened to dump the shares on the open market unless he were given inside information. The company instead refused to cooperate and contacted regulators.