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The onetime employer of former financial adviser William Tatro IV could join Tatro's ex-clients in a bid to get Tatro's bankruptcy case thrown out.
Papers filed last week in U.S. Bankruptcy Court in Rochester by lawyers representing former Tatro clients state that First Allied Securities Inc. plans to file an objection to Tatro's discharge of debts. First Allied attorney James Thoman of Hodgson Russ LLP in Buffalo declined to comment.
The brokerage would base its case for scotching Tatro's bankruptcy on the same allegations of Tatro's alleged mismanagement of client funds and violation of securities law that Tatro's former clients plan to use, the filing states.
In the Oct. 29 Bankruptcy Court motion, lawyers representing 124 former clients called for a Rule 2004 examination. In 2004 inquiries, debtors can be forced to produce a wide range of documents and records, and testimony is transcribed by a court reporter, creating an official record that can be used in other court actions.
Bankruptcy Judge Paul Warren is to consider the Rule 2004 request at a hearing next week.
Tatro filed a Chapter 7 bankruptcy petition July 30 as dozens of the more than 1,000 ex-clients he names as creditors were preparing to target him in Financial Industry Regulatory Authority arbitrations. FINRA is a private-sector enforcer of securities law.
Bankruptcy filings automatically halt FINRA arbitrations, along with any other civil cases debtors face. FINRA typically lets violators settle arbitrations without admitting to wrongdoing, but it also routinely imposes six- and seven-figure fines.
In the Oct. 29 Bankruptcy Court filing, securities lawyer Robert Pearl of the Pearl Law Firm P.A. in Pittsford and Florida and a bankruptcy lawyer working for Pearl, Bruce Lawrence of Boylan Code LLP, allege Tatro committed securities law breaches that won big commissions and fees for him and First Allied but lost big chunks of Tatro's clients' savings.
Whether Tatro will oppose the exam is not clear. At midweek, Tatro's bankruptcy lawyer, Jack Weider, had not filed an answer to the Rule 2004 motion and declined to say whether he planned to oppose it. A Rochester-based special counsel to the Buffalo law firm Damon & Morey LLP, Weider has until midnight Monday to respond.
In August, First Allied filed a motion in Tatro's bankruptcy case, asking to be included in the automatic stay the bankruptcy petition imposed on FINRA arbitrations against Tatro. The brokerage later reversed its position. In a ruling handed down that month, Bankruptcy Judge Warren said FINRA actions could proceed against First Allied but Tatro would at least temporarily continue to enjoy protection against the regulator's arbitrations.
First Allied, which holds an errors-and-omissions insurance policy indemnifying it against losses resulting from Tatro's investment advice, is defending itself in a FINRA action brought by Pearl on behalf of former Tatro clients.
Many of the creditors Tatro names in his bankruptcy-more than 1,000 of the roughly 1,800 he identified in the July petition-are clients whose investments Tatro once guided.
Pearl believes Tatro clients' losses could top $100 million. The insurance policy's limit has not been disclosed, he said in an interview this week, but if an arbitrator were to find Tatro liable for client losses, First Allied could be forced to pay amounts exceeding the policy's limits.
Using a "one size fits all" strategy that ill-served vulnerable clients but ensured big commissions and generous fees for himself, Tatro tied up clients' money in illiquid real estate investment trusts, Pearl and Lawrence claim in the Oct. 29 filing.
Using strategies normally reserved for only the most knowledgeable, well-heeled and risk-friendly investors, Tatro bet financially unsophisticated clients' life savings, "losing all but a small portion of their original investment," Pearl and Lawrence claim in court papers.
Inappropriate investments they accuse Tatro of using include trades in instruments known as inverse and leveraged exchange-traded funds and buy-ins to illiquid, non-traded REITs.
In an outburst during an August hearing, Tatro strongly objected to how Pearl has characterized him.
After Pearl peppered him with questions, Tatro blamed the securities lawyer for ruining his previously successful career as an investment adviser, radio host and guru to other investment professionals. Tatro complained that last year Pearl sent agents to disrupt a Southern Tier investor presentation he had organized and ran Super Bowl ads urging investors to take legal action against Tatro.
In testimony at a later hearing, Tatro said he has started a new coaching business and-after ceasing to do business under several corporate names listed in his bankruptcy papers-has registered at least one new corporation.
Weider has complained during court proceedings and hearings that Pearl was mining Tatro's bankruptcy filings for clients, and he has accused Pearl of violating Bankruptcy Code protocols.
In his original July petition, Tatro stated his total debt as $2.1 million. An amended schedule he filed last month declares an additional $234,000 in new trade and client debt.
Claims could far exceed the $2.3 million total, however. Tatro states amounts owed to most ex-clients at $1, a placeholder for undetermined and most likely far higher sums. Still, Tatro could walk away from the bankruptcy debt-free while ex-clients and other unsecured creditors go unpaid.
Anything realized from the liquidation of the heavily mortgaged properties that account for some $540,000 of the roughly $550,000 in assets Tatro has declared would go to pay off three creditors with a security interest in his properties-a lender, Wayne County and Mary Helen Caprice Mallett, Tatro's wife and sometime business partner.
An in-progress Arizona state court case brought by a former employee against Mallett accuses her of inappropriately steering the former employee, who also used Mallett as an investment adviser, to bad real estate investments. Tatro is mentioned in the complaint but not named as a defendant.
As previously reported by the Rochester Business Journal, the Chapter 7 trustee assigned to Tatro's bankruptcy, Kenneth Gordon of Gordon & Schall LLP, had urged Boylan Code bankruptcy lawyer Devin Palmer to seek a Rule 2004 exam.
As a Chapter 7 trustee, his investigation of Tatro's affairs is limited. But Pearl, Palmer and Lawrence could demand much more detail in a 2004 exam, including information that could help Pearl in FINRA arbitrations, Gordon said. He would be interested in attending any 2004 exam Pearl and the Boylan Code lawyers scheduled, the trustee added.
Pearl said in an interview this week that besides supplying evidence for a challenge to Tatro's debt discharge, he believes a 2004 exam could uncover assets Tatro has not declared. A four-page list of documents and records Pearl is asking Tatro to produce for a 2004 exam includes documents detailing transactions, including asset transfers between Tatro and Mallett, records of companies Tatro did business through, and records of Tatro's and Mallett's dealings with First Allied and other brokerages.
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