StrategicPoint sues Focus Financial for information

Brooke’s note: On Monday, we brought you a story entitled What’s really going on with Focus Financial? The story tells how StrategicPoint Investment Advisors sued Focus Financial Partners in Delaware’s Court of Chancery on Nov. 17 under its holding company, Progressive Financial Strategies LLC. The missing component of that story was what specific allegations StrategicPoint was bringing in its suit. The Progressive complaint became available this week and I read a good part of it today. Here are some of the notable points and allegations it makes.

Focus Financial Partners LLC threw up a series of roadblocks to keep StrategicPoint Investment Advisors, one of its smaller RIA member firms, from gaining access to books and records that would allow it to determine its ownership stake, alleges a complaint filed by through the RIA’s holding company, Progressive Financial. Details of the lawsuit were made public on Tuesday. StrategicPoint manages about $550 million.

The lawsuit seeks to win access to books and records for Progressive.

Rudy Adolf, CEO of Focus Financia, declined to speak about any of the specific legal issues but he characterized the situation as being about a single disgruntled partner whose concerns are personal in nature. The concerns expressed by the suit’s allegations are not shared by any other members firms or the financiers that have recently committed more than $50 million to grow the partnership, he says.

“This is absolutely isolated to one individual,” Adolf adds.

Rudy Adolf: This is absolutely isolated
to one individual.

One alleged exchange between the parties includes an e-mailed request by David Brochu, principal of StrategicPoint to Adolf, asking to see books and records. The response of Adolf was to say that such a review is “only for very large shareholders,” the suit alleges.

In addition, the management team of the New York-based roll-up, which is comprised of 18 firms managing a combined $32 billion, may also not be living up to promises it made in 2006 when it acquired the firm, according to separate allegations in the complaint first filed on Nov. 17.

Redacted records?

According to the suit, StrategicPoint was not concerned enough about Focus Financial to ask to see any books and records for the first three and a half years of the partnership.

The company then became “incredibly concerned” by mid-2009 when the records it saw were not reassuring, the suit adds.

For instance, StrategicPoint principals asked to see Focus Financial’s Schedule K tax form and found the RIA’s ownership was listed as “various.” The records that the big practice aggregator made available to StrategicPoint were redacted in several places, and its principals were told that they could not bring along attorneys or accountants to help review the documents, according to that lawsuit. Adding to concerns was the fact that the name of the auditor itself was redacted, the suit says.

Brochu contends he was forced to sue when what he learned about Focus Financial made further inquiries became necessary. He has fellow stakeholders through his holding company, Progressive Financial.

“[The attorneys] said: you don’t have a choice” as a fiduciary, he says in an earlier interview. “If [Progressive shareholders] come after you [over previously neglected issues], it’s indefensible. You have to validate or disprove concerns.”

Another set of allegations in the StrategicPoint suit addresses matters relating to the original deal between it and Focus Financial. One charge is that Focus Financial may be using more cash for new acquisitions than it was supposed to under guidelines set out in 2005 when it was formed.

Transactional revenue

The suit also says that StrategicPoint’s principal expressed concerns in 2006 about not wanting to be exposed to a company with a similar business model to National Financial Partners. That troubled New York-based roll-up giant firm acquired advisors that relied heavily on transactional revenue. StrategicPoint’s principals believe that Focus Financial may now be going that route in buying commission-based advisors with some of its deals, according to the lawsuit.

“The heavy reliance on commission-based brokerages was one of the reasons that Progressive declined NFP” before going with Focus, the suit reads.

NFP is considered a failure because its earnings dropped from $54 million in 2007 to $14.8 million in 2008 and its shares now trade at less than $9 after going higher than $55 in 2007.

Adolf reiterates that Focus Financial has been thoroughly scrutinized by two tier-one venture capital companies [Polaris Ventures and Summit Partners], a top-notch RIA, [Joel Isaacson and Co.], a bank and other member firms in recent months and that the legal process will show that StrategicPoint’s suit fits in the “nuisance” category.