Brokerage's sale ends a local tale

The Baltimore Sun

Though the ink was still wet on their degrees from the University of Maryland law school, Sewell S. Watts Sr. and his friend William G. Baker Jr. decided their futures would be better spent in a bank than a courtroom.

Banking was not completely foreign to them. Watts was a bank teller while attending law school. Baker came from a well-known banking family in Frederick County. So on March 1, 1900, they hung out their shingle at Baltimore and South streets, starting a banking and investment house called Baker, Watts & Co. with $43,500 in mostly borrowed capital.

Four years later, that corner and much of downtown was devastated by the Great Baltimore Fire. Undeterred, they salvaged whatever papers they could and sought temporary space elsewhere.

A year later, the U.S. Fidelity and Guaranty Building opened at Calvert and Redwood streets and became the new headquarters for Baker, Watts, where it remained for decades. In 1974, the firm moved to the new 42-story USF&G; building at Pratt and Light streets at the Inner Harbor. The partners took the ornate front door with them, because it represented the "stability" of Baker, Watts and had appeared in much of the firm's advertising.

In the beginning, the firm did commercial banking and institutional investing. When laws were passed in the 1930s prohibiting banks from doing both, Baker, Watts focused on the latter, calling themselves "counselors in investments." Clients included Black & Decker Corp. and the Noxzema Chemical Co.

Baker, Watts managed to avoid the merger frenzy of the early 1980s and remained one of the last three independent brokerages in the city, along with Alex. Brown & Sons Inc. and Legg Mason Inc.

But 1987 turned out to be a defining year, and not only because it was the year of the second big stock market crash endured by the firm. That year, Baker, Watts switched from a partnership to a corporation - not unusual for growing firms at the time but a move that foreshadowed more changes to come.

Baker, Watts found itself in trouble when a number of oil and gas tax shelters that it had recommended to customers collapsed. Clients sued for millions. The partners wrote personal checks to help cover legal expenses. USF&G;, the Baltimore insurance company whose relationship with Baker, Watts dated to the founders, bought a 25 percent stake in the firm to stabilize it.

In July 1988, the firm named Richard P. Sullivan, former chairman and chief executive officer of Baltimore's Easco Corp., as chief executive officer to replace Watts, who remained chairman. Immediately, Sullivan made it his mission to find a buyer or merger partner.

That October, Baker, Watts struck an all-stock deal to be acquired by Ferris & Co., of Washington, to form Ferris, Baker Watts Inc.

Though executives from both firms called it a merger, it was not. Ferris, founded in 1932, had $16.7 million in capital while Baker, Watts had $5.5 million.

As a result, George M. Ferris Jr., chairman of Ferris and son of the founder, became chief executive of the new firm and moved its headquarters to Washington. Sullivan assumed the title of president. Baker, Watts workers were folded into Ferris' employee stock option plan. The Ferris plan gave ownership of the company to the workers and was far different from the partnership that owned Baker, Watts.

There was an immediate cultural clash. Baker, Watts was an old-fashioned carriage trade investment firm whose clients spanned generations of wealthy Baltimoreans. Brokers were encouraged to develop longtime relationships with their clients and to sell them premium products such as municipal bonds. Business at Ferris was more transaction-based. B rokers sold newer types of products, such as issuing stock for lesser-known companies.

Many brokers left for the competition after the merger.

In 2001, it incurred an $18 million loss on a loan to a Minneapolis stock trading clearinghouse called MJK Clearing Inc., which collapsed from an international stock scheme. In 2005, Ferris received a settlement from Deutsche Bank AG after the head of the German bank's stock loan department in Toronto was implicated in that scheme.

Last month, the firm offered a settlement worth about $16 million in cash and stock to victims of an investment fraud that involved one of its former brokers.

A former Ferris, Baker Watts client, David A. Dadante, pleaded guilty to creating a Ponzi scheme that took in $50 million from about 100 people in the Cleveland area and elsewhere. Dadante then opened brokerage accounts at Ferris and made illegal trades with the help of broker Stephen J. Glantz.

Dadante and Glantz pleaded guilty to criminal fraud charges. The Securities and Exchange Commission is still investigating Ferris, Baker Watts' handling of the matter. Six high-ranking employees were placed on temporary leave during an internal investigation and three later resigned or retired.

In November, Ferris, Baker Watts disclosed that it had to write down a $7.4 million loss related to investments in debt securities backed by subprime mortgage loans. The bond trader who made the investments was dismissed.

While other firms expanded nationally, Ferris, Baker Watts stayed regional, and very much a family affair.

George M. Ferris, founder of Ferris & Co., died in 1992 at the age of 99.

Sewell Watts Jr., a former senior partner at Baker, Watts and son of the founder, died in December 1986 at age 82. His son, Sewell Watts III, was chairman of Baker, Watts when it merged with Ferris and then served as a managing director of the combined company until he died of complications from back surgery in July 2004 at age 72.

The employee-owned brokerage has more than 900 employees, including 461 in Maryland, and operates in 10 states and in the District of Columbia.

allison.connolly@baltsun.com

Timeline

March 1, 1900: Sewell S. Watts Sr. and William G. Baker Jr. open brokerage at Baltimore and South streets.

1904: Great Baltimore Fire destroys their offices and much of downtown.

1906: Baker, Watts sets up shop at new U.S. Fidelity & Guaranty Building at Calvert and Redwood streets.

1927: Baker, Watts becomes third Baltimore firm to buy seat on New York Stock Exchange.

1974: Baker, Watts moves to new USF&G; building at Pratt and Light streets at Inner Harbor.

1986: Sewell Watts Jr., a former senior partner at Baker, Watts and son of the founder, dies at age 82.

1987: Switches from partnership to corporation. USF&G; Financial Services Group buys 25 percent stake in firm, which is struggling after stock market crash.

1988: Agrees to be acquired by Washington, D.C.-based Ferris & Co. in all-stock deal. Headquarters move to Washington, but the bulk of operations remain in Baltimore.

1992: George M. Ferris, founder of Ferris & Co., dies at age 99.

2004: Sewell Watts III, who was chairman of the company at the time of the merger and served as managing director of the combined company, dies at age 72.

2008: Ferris, Baker Watts Inc. announces it is selling itself to Minneapolis-based RBC Dain Rauscher, a division of the Royal Bank of Canada, for an undisclosed amount.[ALLISON CONNOLLY]

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