More Legal Problems for NFP as They Prepare to Go Private

As it's prepares to go private with a sale to private-equity buyers, insurance broker and benefits roll-up firm National Financial Partners Corp. is facing hurdles created by its independent broker-dealer, NFP Advisor Services Group, writes Bruce Kelly in a recent article in InvestmentNews.

There is a problem with the potential costly legal fallout from NFP advisers' raising money for a $74 million mezzanine loan fund from about 450 investors during the real estate bubble. The Securities and Exchange Commission (SEC) has alleged that it is a Ponzi scheme.

Another problem is a Texas startup, Lion Street Inc., which is well-positioned to take away NFP reps and advisers. Bob Carter, Lion Street's chief executive, was one of the founders of National Financial Partners. He started Lion Street, an insurance agency in 2010. Former NFP advisers and insurance agents have joined Mr. Carter's company. Lion Street is also based in Austin.

Also, in April, National Financial Partners signed a deal with Madison Dearborn to take National Financial Partners private at $25.35 per share, for an equity value of about $1.3 billion. It is not completely clear whether Madison Dearborn had any knowledge of the potential threat of Lion Street or the legal fallout of NFP advisers' selling the Ponzi scheme, called True North Finance Corp.

The SEC sued True North and four executives in 2010 for alleged fraud in the offering. According to the SEC's complaint, the True North fund raised approximately $21.6 million between March 2008 and August 2009, which was the period of the alleged fraud.

It's unclear which company will be liable for investor lawsuits stemming from NFP advisers' selling the True North scheme. While the SEC has not filed a complaint against NFP in the matter, some clients have turned to plaintiff's attorneys and filed arbitration claims again NFP with the Financial Industry Regulatory Authority Inc.

According to the InvestmentNews article, in a November court filing, the SEC said NFP Securities “brought in a majority” of the investors in the True North fund. NFP suspended offering the fund to its customers in December 2008 pending the outcome of a third-party due-diligence review, according to the SEC. In February 2009, NFP ceased offering the fund to its customers, according to the SEC. Investors stopped receiving interest payments that November. The investors included nurses, retirees, teachers, multimillionaires and real estate developers, according to the SEC.

NFP Advisor Services Group, which is registered with FINRA as NFP Securities Inc., is one of the largest independent broker-dealers in the industry. In 2012, it generated $364.8 million in gross revenue and had 1,291 producing reps and advisers, according to the InvestmentNews list of top independent broker-dealers.

NFP Advisor Services Group was one of the most aggressive buyers of financial advisory practices before the 2008 financial crisis. Advisers sold a percentage of their practices to National Financial Partners in return for company stock, which peaked above $54 per share in October 2007 and then fell to as low as $1.21 just 13 months later, before rebounding. Today, the shares trade around $25.

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