Former financial adviser William Tatro IV conspired with his wife and business partner in a multimillion-dollar fraud, Morgan Stanley Smith Barney LLC claims.
The brokerage, whose Phoenix branch briefly employed Tatro's wife, Mary Helen Caprice Mallett, made the claims in papers filed last month in Tatro's ongoing bankruptcy case in Rochester. Morgan Stanley claims Mallett lied to obtain a job tied to payments totaling some $4 million and transferred $1.6 million of the alleged fraudulently obtained money to Tatro.
In the course of separately pursuing Mallett in a Financial Industry Regulatory Authority arbitration, it "uncovered evidence leading inescapably to the conclusion that (Tatro) conspired with Mallett to defraud (Morgan Stanley)," the brokerage states in the Bankruptcy Court filing.
FINRA, a private-sector securities regulator formed in a merger of the enforcement arms of the New York Stock Exchange and Nasdaq, holds arbitrations to air client complaints against brokers and broker-dealers. While it has imposed up to eight-figure fines on alleged securities law violators, it typically allows them to pay without admitting legal wrongdoing.
Tatro's and Mallett's alleged scheme involved a 2010 loan agreement inked as part of a plan allegedly hatched before Mallett sought work from Morgan Stanley, the brokerage claims in court papers.
The loan agreement called for Mallett to lend Tatro half of the proceeds of the roughly $3 million first installment of the $4 million Morgan Stanley loaned to her, sending the sum to Tatro as soon as Morgan Stanley advanced the money to her. Tatro would have to repay Mallett only under circumstances outlined in their prenuptial agreement, the couple's loan pact states.
The provision allowing for Mallett to forgive the loan to Tatro in essence means Tatro "would be obligated to repay Mallett only if the fraud were uncovered and Mallett were required to repay the loans to Morgan Stanley," the brokerage maintains in its filing.
In an answer and counterclaim to Morgan Stanley's FINRA complaint, Mallett denies any wrongdoing and maintains she fully disclosed her dealings with Tatro to Morgan Stanley as an essential part of her marketing plan. Alleging fraud and ill dealing by Morgan Stanley, she is demanding punitive damages from the brokerage, a FINRA report detailing the ongoing case states.
In its Rochester Bankruptcy Court filing, Morgan Stanley asks for additional time to mount a challenge to Tatro's bankruptcy.
Citing the extraordinary complexity of Tatro's 637-page bankruptcy petition, some Tatro creditors and the U.S. Trustee also asked for more time to consider whether to mount objections.
The Morgan Stanley filing on Jan. 30 came a day ahead of a ruling by Bankruptcy Judge Paul Warren giving a group of Tatro creditors extra time to object to Tatro's discharge. Warren also gave the green light to the request by creditor group's attorney Robert Pearl to probe Tatro's business dealings in a Rule 2004 exam.
In Rule 2004 proceedings, debtors and their business associates can be compelled to produce detailed records. Pearl has named dealings between Tatro and Mallett as figuring prominently among matters he plans to delve into in a Rule 2004 exam.
In accusations aired in open court and in filings, Tatro's bankruptcy lawyer, Jack Weider, a special counsel in Rochester to Buffalo-based Damon & Morey LLP, routinely has accused Pearl, whose firm maintains a website devoted to warning current and former clients of Tatro and Mallett of the couple's alleged misdeeds, of creating overblown charges against Tatro as a recruiting tool.
The Bankruptcy Court motion Pearl filed asking for a Rule 2004 exam "repeats some of his usual diatribes against (Tatro) repeating false and defamatory allegations," Weider states in court papers arguing against the exam.
Tatro filed a Chapter 7 petition in the Bankruptcy Court here last August. His debts could climb far higher than the $2.1 million he states in the August filing, which lists a token $1 sum as the amount owed to each of more than 1,000 former clients the papers name as creditors.
Pittsford- and Florida-based Pearl Law Firm P.A., represents some 120 ex-Tatro clients. Tatro's ex-clients' claims against the former investment adviser and portfolio manager would total in the tens of millions and could top $100 million, Pearl predicted.
While their cases are in progress, bankruptcy petitioners enjoy a halt on all non-bankruptcy legal proceedings filed against them. Such automatic stays extend to arbitrations as well as to court cases and stay in place unless a bankruptcy judge orders them lifted.
Pearl last year asked for the stay on a Tatro FINRA arbitration to be lifted. Warren let the stay stand with regards to Tatro's ex-clients, but said Pearl could continue pursuing Tatro's former employer, San Diego-based First Allied Securities Inc. First Allied and the ex-client group subsequently agreed to settle the dispute.
Pearl has said he is ready to proceed with 100 or more Tatro-related FINRA claims.
Citing a policy against speaking about pending litigation, First Allied officials have declined to comment on Tatro's bankruptcy.
Tatro's bankruptcy petition names Mallett, whom Tatro partnered with in the financial adviser business for several years before they married in 2011, as a secured and unsecured creditor.
Morgan Stanley filed complaints with FINRA and an Arizona state court against Mallett last year, shortly after it fired her for allegedly lying about professional ties to Tatro. The brokerage wants Mallett to return some $4 million it loaned her as an advance on commissions she was expected to earn over nine years. It fired her after nine months on the job.
The Arizona court turned down Morgan Stanley's request to put liens on Phoenix-area properties Mallett allegedly bought with proceeds of the $4 million advance, calling encumbrances on the properties premature pending a resolution to the brokerage's underlying FINRA complaint.
Morgan Stanley's FINRA complaint states Mallet promised in a job interview to bring with her a book of business purchased from Tatro.
Though Mallett assured the interviewer Tatro had bowed out of portfolio management to pursue careers as a radio host, speaker and business coach, and she alone would service ex-Tatro clients, the brokerage claims in the complaint, she eventually admitted she was not acquainted with some ex-Tatro clients.
In an exam of Tatro, Chapter 7 trustee Kenneth Gordon of Gordon & Schaal LLP raised the question of whether the $4 million Morgan Stanley payment might be considered to be a price paid for Tatro's book of business and this would be claimable by Tatro's creditors.
Pearl has questioned the sale of Tatro's book of business to Mallett, Tatro's purchase of a money management firm from Mallett and a $450,000 second mortgage on Tatro's Wayne County property that Mallett holds.
Tatro's bankruptcy petition states Mallett paid $800,000 in 2010 to take over his book of business.
Evidence introduced by Morgan Stanley as part of its Bankruptcy Court motion includes a November 2010 letter from Tatro telling Mallett's clients that Tatro had purchased Mallett's Biltmore Wealth Advisors LLC firm and would be handling Biltmore clients' accounts going forward.
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