Brokerage deals with fallout from flimflam
After the meltdown of its No. 1 producer, GunnAllen Financial tries to pick up the pieces.
By Scott Barancik, Times Staff Writer
Published October 25, 2007
The kudos were pouring in for Frank Bluestein. GunnAllen Financial of Tampa had named him its No. 1 producer among more than 800 independent brokers nationwide. Detroit's DBusiness magazine described the 58-year-old Highland, Mich., resident, who says he began trading stocks at age 12, as "one of the nation's most successful financial planners." Registered Repranked him the country's fourth-busiest independent adviser, with $1-billion in client funds under management. "Frank is the smartest and hardest-working guy I know," GunnAllen national sales manager David Levine told DBusiness this summer. "The numbers don't lie." So much for the truth.
In a remarkable meltdown that led to Bluestein's resignation last month and his formal termination last week, the pudgy Michigan native is accused of putting hundreds of clients - including some of his own GunnAllen customers - into questionable partnerships that the brokerage firm says it knew nothing about.
Millions of dollars in unauthorized investments went undetected until several months ago, when clients began reporting that their monthly dividend checks had bounced.
The Securities and Exchange Commission, Financial Industry Regulatory Authority and FBI are among those investigating the partnerships. A Houston law firm is trolling for plaintiffs for a possible class-action lawsuit.
The Bluestein affair raises questions about GunnAllen's supervision of its top gun. In interviews this week, GunnAllen's Levine and general counsel David Jarvis depicted Bluestein as a star performer with a good heart who inexplicably went to great lengths to conceal a lucrative side business from the firm. They said Bluestein neither informed GunnAllen of his outside activities, as required by stock-exchange rules, nor obtained the firm's prior permission, as per his GunnAllen contract.
When GunnAllen staff flew to Michigan to conduct routine supervisory visits, Blue-stein allegedly hid all materials that referenced the rogue investments. Such transactions may have been going on as long as a decade - well before Bluestein, who has a second home in Port Charlotte, joined GunnAllen as an independent contractor in 2005.
"Frank deliberately subverted our efforts to protect our customers," Levine said. "It was a tremendous professional and personal letdown for me."
Matthew Leitman, Blue-stein's attorney, said the broker denied doing anything wrong and lost a great deal of his own money on the very same investments.
Asked whether Ed May - a Michigan businessman who designed many of the partnerships and recently sued Blue-stein for fraud - may have misled Bluestein about the investments' validity, Leitman said it remains to be seen. Bluestein declined to comment.
For GunnAllen, the Bluestein affair may prove costly in more ways than one.
- The firm may face years of litigation. Kirk Smith, a lawyer at Shepherd Smith & Edwards, a Houston law firm that files class-action suits on behalf of aggrieved investors, said it has already interviewed more than 100 former Bluestein clients and believes GunnAllen is liable for their losses. "Blue-stein was a stockbroker who worked for GunnAllen," Smith said in an e-mail. "In my opinion, they are responsible for any security he sold to their joint clients." In response, GunnAllen's Jarvis claimed the firm was vigilant in its supervision of Blue-stein and met all regulatory criteria for supervision. Last week, it took the unusual step of filing a defamation suit against Smith and his law firm.
- GunnAllen will lose clients. About 10 percent of Blue-stein's former customers already have closed their accounts with the firm. More may do so as news of his alleged misdeeds spreads.
- Its reputation may suffer. Not long ago, statistics showed that GunnAllen brokers were far more likely to have a history of compliance problems than average. As part of an effort to clean up its image, in 2005 the firm parted ways with a number of those individuals. The Bluestein affair could undermine some of its reputational gains.
Bluestein's No. 4 ranking in Registered Rep may be among the first casualties. GunnAllen's Levine said Bluestein evidently self-reported having $1-billion under management and in fact controlled nowhere near that much money.
Times researcher Caryn Baird contributed to this report. Scott Barancik can be reached at firstname.lastname@example.org or (727) 893-8751.
CEO: Richard Frueh
Local staff: 250+
Independent brokers: 800+
Annual revenue: $136.5-million
Rank among U.S. independent brokerages: 21st
Sources: Florida Trend, InvestmentNews