Former financial adviser William Tatro IV could face a deepening Bankruptcy Court investigation of his dealings.
In a hearing this month, Chapter 7 trustee Kenneth Gordon of Gordon and Schaal LLP urged lawyers representing Tatro's creditors to seek a Rule 2004 examination. Under the rule, debtors as well as their associates and business partners can be forced to testify and produce a wide range of documents in court.
"I highly recommend it," Gordon advised creditors' lawyer Devin Palmer of Boylan Code LLP, after noting that as a trustee he could conduct only a limited probe of Tatro's affairs. "It would give you the power to get some documents going your way."
Gordon has questioned Tatro in Section 341 hearings, procedures undergone by all bankruptcy filers in which trustees quiz debtors to see what, if anything, might be squeezed out of their assets. Rule 2004 exams can go far deeper.
Palmer has not yet asked for a 2004 exam of Tatro, but he said he had drafted a 2004 motion and planned to file it soon.
Tatro, a well-known figure locally who was host of financial advice radio programs here and in Arizona, filed a Chapter 7 petition in July as he faced a rising tide of complaints filed with the Financial Industry Regulatory Authority by disgruntled ex-clients.
Formed in a merger of the enforcement arms of Nasdaq and the New York Stock Exchange, FINRA is a private-sector financial-industry regulator. To handle investor complaints, it mounts arbitrations. FINRA typically lets securities law violators settle complaints without admitting to wrongdoing, but it also doles out six-figure and occasional seven-figure fines.
Tatro's former employer, San Diego-based First Allied Securities Corp., for example, paid $530,449 in 2010 to settle a FINRA complaint against Tatro by Midlakes Management Corp., a Clifton Springs medical practice-management firm.
Unless a judge says otherwise, bankruptcy at least temporarily halts all legal proceedings against debtors, including FINRA arbitrations.
Tatro's Chapter 7 petition lists hundreds of ex-clients as creditors. The $2.1 million in liabilities he states in the filing could climb much higher. Most of approximately 2,000 unsecured creditors named in the filing are listed as being owed $1, which usually is a placeholder for undetermined sums.
Robert Pearl of the Pearl Law Firm P.A. heads a securities law firm with offices in Pittsford and Florida. He represents some 100 ex-clients of Tatro, many of whom have filed FINRA complaints.
Pearl's firm has set up a website to solicit investors dissatisfied with financial advice they received from Tatro or Tatro's wife, colleague and sometime business partner, Mary Helen Caprice Mallett.
Pearl estimates investors' Tatro-related losses at $10 million to $100 million. Investors previously have filed some 50 complaints against Tatro with FINRA, resulting in settlements totaling more than $3 million, says the Pearl Law Firm's website, tatrolawsuits.com.
In an impassioned outburst during a bankruptcy hearing last month, Tatro blamed Pearl for his bankruptcy, alleging that Pearl's aggressive advertising had driven away clients, not only ruining Tatro's investment advisory business but also torpedoing profitable sidelines as a motivational speaker and coach to other investment professionals.
After enduring a string of sharp questions from Pearl in a 341 session last month, Tatro complained, "I've heard nothing but crap here," going on to outline Pearl's allegedly unfair treatment of him.
"I ran in August of last year, in 2011, a town hall meeting in Corning, N.Y. Mr. Pearl's operatives went down there and in my opinion disrupted my town hall meeting. ... There was then ... the most unprecedented media campaign against me that went into radio, television, (telephone) numbers and the Internet.
"Sitting and watching the World Series in Arizona and seeing at the seventh-inning stretch that there was an advertisement-'If you've done business with Bill Tatro (or) Caprice Mallett, call this 800 number'-that's how it began. It was merciless. Website, phone calls, you name it. They came after me; I watched and tried, foolishly, to maintain my businesses."
In complaints voiced in court and at hearings, Tatro attorney Jack Weider, a Rochester-based special counsel to the Buffalo-based Damon & Morey LLP, has protested Pearl's tactics, accusing Pearl of improperly using Tatro's bankruptcy filing to fish for clients and of interjecting questions designed to cast Tatro in a bad light that are irrelevant to the proceedings at hand.
In an interview, Pearl insisted he had begun targeting Tatro and directing advertising at Tatro's and Mallett's clients only after several clients had hired him and research into their complaints showed him the extent of the couple's allegedly improper practices.
In FINRA complaints he is pressing against Tatro, Pearl-whose firm hired Boylan Code lawyers Bruce Lawrence and Palmer to handle the bankruptcy side of the Tatro case-accuses Tatro of using a "one-size-fits-all formula" that routinely put clients in illiquid and money-losing investments but generated big commissions for Tatro.
Marcia Sebold, a former employee of Mallett who also hired her as an investment adviser, sued Mallett in an Arizona state court in 2008. The complaint echoes claims made in Pearl's FINRA complaints against Tatro.
"Mallett used deception, a deceptive act or practice, fraud, false pretense, made a false promise, made a misrepresentation and/or concealed, suppressed or omitted a material fact" in steering Sebold into money-losing real estate investments, Sebold's lawyer, Paul Conant of Conant & Associates PLC in Phoenix, alleges in the complaint. The case is ongoing.
In a related action, a Lloyds of London syndicate sued Mallett last year in federal court in Arizona, taking the position that since Mallett had inappropriately advised Sebold, it should not have to cover any damages Mallett might be ordered to pay.
After buying Tatro's investment advisory business, Mallett, who had previously worked for First Allied, went to work for Morgan Stanley Smith Barney LLC in Phoenix in 2010.
According to a lawsuit Morgan Stanley filed against Mallett last year, Mallett told Morgan Stanley that she and Tatro had used the same investment strategy over the previous nine years and that she had bought Tatro's book of business. Morgan Stanley fired Mallett in 2011, charging that she had falsely told them Tatro was no longer servicing his former clients.
She and Morgan Stanley are in arbitration over some $4 million the firm advanced to Mallett and wants her to pay back. Chapter 7 trustee Gordon also has said that he is interested in finding out whether the $4 million could be claimed as an asset in Tatro's bankruptcy.
In August, Bankruptcy Judge Paul Warren said Tatro could for the time being personally enjoy protection from FINRA arbitrations. However, Warren also said FINRA could start arbitrations against First Allied as the holder of an errors-and-omissions insurance policy that covered Tatro's alleged misdirection of client funds.
Because the only significant assets Tatro lists in bankruptcy papers are his heavily mortgaged Wayne County home and an adjacent golf course he formerly ran but has shut down, Gordon and others familiar with his bankruptcy have characterized his case as a probable no-asset filing.
Tatro's bankruptcy filing states the assessed value of his Wayne County properties at $544,600, but the filing also says Tatro believes them to be worth less.
In the Section 341 sessions he has held, Gordon, who as a trustee can sue to recover assets from creditors and others to whom Tatro might have improperly transferred money or property, questioned Tatro closely on dealings with Mallett.
Mallett is listed in Tatro's filing as buying his investment advisory business in 2010 for $800,000 and as holding a second mortgage on his Wayne County properties.
As Pearl firm associate Jason Kane hit Tatro with a long string of questions during the second of those sessions this month, Weider countered with a string of objections, warning that Kane's queries were out of place at the hearing.
"A lot of what you're asking now is, I think, a bit far afield for a 341 meeting," he told Kane.
However, Gordon then volunteered, such questions could be posed appropriately at a 2004 exam and could bolster the Pearl firm's clients' cases in FINRA arbitrations.
"Maybe you're estopped from doing discovery in the context of your FINRA arbitration," he told Kane, "but 2004 gives you additional rights to request (information). Who knows what the judge and Mr. Weider are going to do in response to those requests, but at least you could request documentation and you can ask a lot of these questions.
"I'm interested in seeing you pursue that 2004." Gordon said. "I might even come."
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