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Letter to the editor

Duped investors sue GunnAllen brokerage

Clients who lost millions blame the Tampa firm for a star broker's alleged scheme.

By SCOTT BARANCIK, Times Staff Writer
Published March 11, 2008

Frank Bluestein may have cheated as many as 1,000 clients.

GunnAllen Financial says it shouldn't be held responsible for the actions of former broker Frank Bluestein, who secretly sold phony investments to hundreds of clients before the scheme was uncovered last year. But a growing number of clients disagree.

Last week, two former Bluestein clients filed suit in Detroit federal court against GunnAllen and others, accusing the Tampa brokerage firm of failing to adequately supervise its top-earning broker. The purported class-action suit estimates as many as 1,000 investors may have lost as much as $350-million on the so-called Ponzi scheme, though not all made their investments through Bluestein. Also named were E-M Management Corp., which created the allegedly fraudulent investments, and Questar Capital Corp., Bluestein's prior broker-dealer.

Meanwhile, roughly 70 arbitration claims have been filed against GunnAllen and others with the Federal Industry Regulatory Authority, a nongovernmental entity formerly known as the National Association of Securities Dealers. Like the federal lawsuit, the arbitration claims seek damages from GunnAllen for failing to detect Bluestein's alleged scheme.

GunnAllen executives say that while they sympathize with Blue-stein's clients, the brokerage firm is not legally responsible for their losses and is merely being targeted because of its deep pockets. In an interview Monday, general counsel David Jarvis said there was no way the firm could have known Bluestein, who ran a branch office in suburban Detroit, was secretly selling unapproved, unregistered securities to some of his GunnAllen clients. He added that Questar - which served as Blue-stein's broker-dealer from 2000 to 2005 - also never detected the scheme.

"There's nothing in the rules that says, 'We're going to hold you responsible for active concealment by one of your reps,' " Jarvis said. "We are fervent in our belief that our supervisory systems and our effectuation of the policies and procedures is more than adequate."

West Bloomfield, Mich., lawyer Tony Trogan, who served as co-counsel for the arbitration claimants, said he finds it hard to believe that GunnAllen didn't know about the illegal investments. "You're talking about hundreds of investors. How could this guy have been selling these for 2 1/2 years and they not seen it? The answer is they couldn't have, or at least that's our belief," he said.

Attorney David M. Foster of Farmington Hills, Mich., who represents Bluestein, said the question of his client's - and GunnAllen's - culpability may be moot. Edward May, the E-M Management Corp. principal who allegedly designed the fraudulent investments Bluestein sold, is the "primary actor," Foster said. And according to the U.S. Supreme Court, he added, there is no liability for "aiders and abettors" under federal securities law.

Bluestein, who resigned from GunnAllen in September, hasn't lost his zest for investing. He recently helped launch FreedomRoadTrading.com, a stock-picking Web site where he is known by his first and middle names, Frank Jullian, and shares his "million-dollar secrets" for a price. Meanwhile, a local Fox TV news reporter who recently inducted Bluestein into his "Hall of Shame" has broadcast several followup items on the man he calls "Frankie Blue."

According to last week's lawsuit, Bluestein told clients they were buying into partnerships that supplied telecommunications services to well-known hotel chains and casinos. He guaranteed that the investors, mostly retirees from the Detroit area, would get back not only their principal but roughly two years' worth of monthly profit-sharing checks, plus up to a dozen more years of nonguaranteed payments.

In reality, new investments were simply used to pay off earlier ones. The Ponzi scheme allegedly lasted for nearly 12 years until mid 2007, when funds ran out and checks began to bounce.

"Many of the investors were victims of their own greed," GunnAllen's Jarvis said.

Scott Barancik can be reached at barancik@sptimes.com or (727) 893-8751.

[Last modified March 10, 2008, 22:31:30]