Securities Law Blog

GunnAllen Financial Inc. has been shut down by the Financial Industry Regulation Authority (FINRA) for failing to meet its mandatory net capital requirements. On Friday March 19, 2010 FINRA warned the Tampa, Florida based broker/dealer that it had fallen below its capital requirement, and was subsequently unable to open for business the following Monday.

The closing has left 400 reps and advisers to look for new firms. One of the largest branch offices at GunnAllen, RG Michals Holdings Inc., will be moving roughly 70 brokers to Aegis Capital Corp. According to Investment News, “One of the biggest problems facing the 400 or so reps and advisers who remain at the company is finding an independent broker-dealer that uses its clearing firm.”

Upon closing, GunnAllen’s clearing firm, Ridge Clearing & Outsourcing Solutions, Inc. took over client accounts. J.P. Turner & Co. LLC, Aegis Capital and Lombard Securities Inc., are among the few firms that have access to Ridge.

There are several factors that are believed to have lead to the firm’s closing. The broker/dealer has been caught in a swarm of client lawsuits, some seeking as much as $50 million in damages. Many of the claims stem from disgraced broker Frank Bluestein’s alleged activities related to a Ponzi scheme that fell apart in 2007. The SEC charged Bluestein with fraud for soliciting roughly 800 investors who invested $74 million in an alleged Ponzi scheme. Other client lawsuits have been filed against GunnAllen over the sale of Provident Royalties LLC private placements. According to GunnAllen executives, legal costs mounting to about $500,000 per month were devastating the firm.

Some speculate that despite the firm’s investment in compliance systems and hiring compliance personnel, the presence of ethically challenged brokers was a major contributing factor to GunnAllen’s ruin. According to the firm’s former general counsel, David Jarvis, GunnAllen “let the inmates run the asylum, and that’s where the firm failed.”