A broker at HighTower Advisors LLC, the startup with the sterling pedigree, has been sued over the sale of private notes into a feeder fund for what turned out to be a massive Ponzi scheme.
Investors in Florida filed two lawsuits in state court in Palm Beach County last month against HighTower and one of its brokers, Curtis Lyman, alleging investment fraud, the sale of unregistered securities, breach of fiduciary duty and negligence.
The two investors filing the suits, Deborah Marlin and Robert Kimmel, state that they invested $217,000 and $4.4 million, respectively, in promissory notes with Banyon 1030-32 LLC. Banyon went into default on the notes in November when the $1.4 billion Ponzi scheme, controlled by disbarred attorney Scott W. Rothstein, was exposed.
FACES 100 YEARS
In January, Mr. Rothstein pleaded guilty to running the largest investment fraud in the history of South Florida. When he is sentenced May 6, he could receive up to 100 years in prison.
Independent broker-dealers of all stripes are feeling pain and pressure over the sale of private investments that allegedly were part of or related to Ponzi schemes.
This year, the Financial Industry Regulatory Authority Inc. expelled Provident Asset Management from the securities business for its role in a $485 million Ponzi scheme.
The Massachusetts Securities Division has stated that it is looking for information about the sale of private placements at a handful of independent broker-dealers. Most notably, it sued Securities America Inc., a unit of Ameriprise Financial Inc., at the end of January, alleging that it misled investors who bought nearly $700 million in the Medical Capital private placements.
Individual investors who bought Provident private placements, as well as those issued by Medical Capital Holdings Inc., have filed numerous lawsuits against brokers and their firms.
The Banyon fund was controlled by George G. Levin. According to the lawsuits, the HighTower broker, Mr. Lyman, told investors that Mr. Levin was looking for capital to put into structured legal settlements. Mr. Lyman allegedly told investors that Banyon would produce a guaranteed rate of return through the notes. The plaintiffs also claim that the adviser stated the investment was low-risk, safe and secure.
According to court documents, the promissory notes were scheduled to pay a return of 16% per year. Mr. Lyman's clients were investing in Banyon notes as late as October 2009, weeks before the Ponzi scheme was revealed, the lawsuit alleges. The lawsuit does not put a figure on the commission Mr. Lyman was paid to sell the notes.
Mr. Lyman joined HighTower in December 2008, Finra records show.
Mr. Lyman told investors that “he normally did not do "private deals,' as he was very leery and cautious of them,” but that he had known Mr. Levin for a long time and that he personally guaranteed the notes, according to the lawsuits.
HighTower has been a high-profile firm since it opened in 2007. Led by investors such as former Morgan Stanley chief executive Philip Purcell and David Pottruck, ex-CEO of The
Charles Schwab Corp., it has successfully recruited major adviser teams and talent from Wall Street firms.
HighTower's advisory group has more than $1 billion in client assets, according to its filing with the Securities and Exchange Commission. Published reports indicate that overall, HighTower has attracted $16 billion in client assets.
The broker named in the suits, Mr. Lyman, allegedly told clients just months before the Banyon investment collapsed that he still had confidence in the notes.
“I remain comfortable on the Banyon program,” Mr. Lyman wrote in an e-mail to a client in June 2009.
“Business has remained strong, and they have not "oversubscribed' their demand, which is the biggest business risk I think they have,” he wrote. “My recommendation is to renew the notes.”
This is not a case of a broker “selling away,” or selling investments without the knowledge of his broker-dealer, said Scott Silver, a plaintiff's lawyer representing one HighTower client who bought the Banyon notes.
HIGHTOWER'S APPROVAL?
As an indication that HighTower approved the product, Mr. Silver pointed to the fact that Banyon appeared on the account statements of Mr. Lyman's clients.
“We were shocked that HighTower approved the sale of Banyon to its customers,” said Mr. Silver, who last Wednesday filed a $1 million arbitration claim against HighTower in which he makes allegations similar to those in the two other investor lawsuits.
An attorney for HighTower said the firm was well-aware that Mr. Lyman sold the product, although he had initially sold it before joining HighTower.
“It would never be accurate to say HighTower didn't know anything about the investments,” said David H. Kistenbroker, managing partner with Katten Muchin Rosenman LLP, who represents HighTower. “The original investments were placed at end of 2008, before Lyman joined HighTower. The notes were rolled over at periodic intervals. Once Lyman [moved to] HighTower, they were aware of and understood the product.”
He said that the firm had a due- diligence file on the Banyon product, but because of the current litigation, he could not comment in greater detail.
“We are comfortable that HighTower and Lyman met every legal and regulatory standard,” Mr. Kistenbroker said.
Prior to signing on with HighTower, Mr. Lyman worked for USF Securities LP, USF Advisors LLC and Capital Market Strategies LLC, according to his Finra records.
Elliot Weissbluth, a manager of HighTower Holdings LLC — the company that owns the broker-dealer — was the president of the US Fiduciary LP brokerage and advisory units when Mr. Lyman was hired by USF Securities in November 2005.
Mr. Lyman made the Banyon investments after Mr. Weissbluth left the US Fiduciary management team in 2007, Mr. Kistenbroker explained.
Mr. Lyman had a “significant investment” in the fund and lost money too, Mr. Kistenbroker said.
E-mail Bruce Kelly at [email protected].
