Celebrity clients can be great. But, when things go wrong, they go VERY wrong. In these disputes, you’re fighting with one hand tied behind your back. In our star-obsessed culture, the public is much more willing to give a star the benefit of the doubt, regardless of the facts, than their financial advisor.
In my 30 years as an advisor I’ve worked with thousands of clients, including a number of professional athletes. I never had a single client complaint, let alone lawsuit. Then in 2010, former Major League Baseball players, Cliff Floyd and Rondell White, who had been clients of my firm for more than 15 years, sued me and my firm for securities fraud in reference to two separate private placement investments.
The first lawsuit had to do with an investment they made in 2007 that involved an eight-acre waterfront parcel in Hackensack, NJ on which we hoped to develop an apartment complex. Not only did they invest, but my partners and I also committed in excess of $2 Million and personally guaranteed the underlying mortgages.
Unfortunately in 2008 and 2009 the world suffered an economic crisis which dramatically affected real estate throughout the entire country. After trying our best to make this real estate venture profitable, we eventually sold the land in December 2012 at a loss.
Subsequently, they filed suit in federal court claiming they had been victims of a real estate scam and securities fraud. Within minutes, Sports Illustrated’s website published an article--“Former players’ lawsuit claims they were bilked in real estate scam.” The headline was eye-catching, but the reality was, there was no crime. It was a venture that failed when the market collapsed and my partner and I lost money along with everyone else. But, as Mark Twain said, “never let the facts get in the way of a good story.”
Floyd filed a second suit against my partner regarding a private placement investment he contends he never authorized. Even though I had nothing to do with that offering, and was unaware of my partner’s involvement, I was sued along with my ex-partner for securities fraud. Although I was eventually dismissed by Federal Judges from both lawsuits, the NJ Bureau of Securities found some administrative deficiencies and accused me of not supervising my ex-partner properly. They assessed me a ridiculously large fine and did not approve my re-registration for a period of six months.
In addition to the NJ Bureau of Securities’ investigation, I was also investigated by the IRS, SEC and FINRA as well as the NJ Attorney General's Office. Nothing came of those investigations and eventually they were administratively closed--but the damage was done.
In a business where we depend on recommendations, my name was destroyed. In the age of Google, every negative article, every negative mention would exist essentially forever. This wasn’t just a mark against me, but also against my employees and my son who, at the time, was just starting his career as a Certified Financial Planner.
To make matters worse, in the wake of the lawsuits and subsequent bad publicity, which included a segment on ESPN, Royal Alliance, my then broker dealer, terminated our relationship without giving me a chance to defend myself, despite the fact that I had been a top producer for years.
After separating from Royal Alliance, under whose corporate registered investment advisor I had operated, I immediately formed Kolinsky Wealth Management, an investment advisory firm registered with the SEC. The stumbling block came in getting approval from the New Jersey. After months of effort and hundreds of thousands of dollars in legal expenses, I signed a consent order that stipulated I had failed to properly supervise my partner and failed to adequately disclose my outside business interests.
Most of the consent order dealt with actions taken by my former partner and included another individual. Rather than pursue separate actions against each individual, the state opted to lump them all together to make a bigger case. For the relatively minor administrative infractions which the Bureau found against me, the fine and suspension were dramatically out of proportion.
Regardless of how I personally felt, I assumed the best thing would be to accept the New Jersey Bureau of Securities’ action, pay the penalty and move on. I couldn’t have been more wrong.
Three years later I am still dealing with the fallout. If a prospective client does a search, they don’t find anything about the thousands of satisfied clients we’ve helped. What they find are stories about two high-profile disgruntled clients and their attacks against me.
I’ve learned that even the most honest advisor can be mired in a similar bureaucratic nightmare. Hopefully, other advisors can benefit from my experience.
The easy way out usually isn’t!
I agreed to sign the consent order with the NJ Bureau of Securities because it would have taken me 18-24 months to appeal their finding. During that time I would not have been licensed as an Investment Advisor which would have dramatically impacted my clients and business.
While I might have been able to weather that storm, it would be grossly unfair to my employees, their families, and our clients. Perhaps I would have been better served to move my business into another state while continuing to fight in New Jersey.
Hindsight is 20/20, but in retrospect it seems obvious that even though it would have been a protracted proceeding, I should have fought this tooth and nail. Being sued is not the big deal. In our litigious society, that’s a simple fact of life. It’s the damage to my reputation. That’s what really hurt.
Working with celebrities comes with benefits. But you need to fully understand the risks to your business and name if that relationship turns sour. For a celebrity, one phone call gets the world jumping. When you are a financial advisor dealing with a celebrity issue, there is nobody you can call.
Steven Kolinsky is Founder and Managing Member of Kolinsky Wealth Management, LLC, an SEC Registered Investment Advisor. He has earned the distinguished Chartered Life Underwriter (CLU) and Chartered Financial Consultant (ChFC) designations from the American College and is a lifetime and qualifying member of the prestigious Million Dollar Round Table. In addition, his memberships include: American Association of Life Underwriters (AALU), National Association of Insurance and Financial Advisors (NAIFA) and Society of Financial Service Professionals (FSP). Kolinsky is also a past President of the UJA/Federation of Rockland County, New York.