Ferris, Baker Watts Inc., one of a vanishing breed of small independent brokerages in an industry dominated by Wall Street giants, has agreed to sell itself to Canada's largest bank, which will fold the firm into its Minneapolis-based money manager RBC Dain Rauscher Inc.
The deal with Royal Bank of Canada marks the end of local ownership for a firm that has survived two world wars, the Great Depression and countless boom-and-bust cycles while building a local reputation as a conservative place to invest money.
With Baltimore roots dating to 1900, Ferris outlasted a long list of other homegrown companies that have disappeared from the city's skyline, taking with them the prestige that comes with being a headquarters town. It was long anticipated that Ferris would join that list as industry consolidation made it increasingly difficult for small brokerages to compete.
The pressure to sell grew as a series of legal, regulatory and financial setbacks sapped the employee-owned firm of needed capital in recent years. The difficulties culminated with news last year that a former broker and client used the firm's trading desk in a stock manipulation scheme, spawning a costly federal investigation and civil lawsuits. The deal with Dain Rauscher was contingent on Ferris setting up a reserve to handle claims stemming from the incident.
John Taft, Dain Rauscher's chief executive, acknowledged that industry changes have made it tough for smaller firms such as Ferris to stay independent. Dain Rauscher's strategy is to maintain the best elements of a small "boutique" brokerage while drawing on the global financial resources of its corporate parent.
"The problem is that in this day and age, the technology requirements, product platform, training and support and educational requirements to be good at wealth management are too expensive for a small firm to support," he said.
Nothing will change for Ferris customers in the short term. The deal, which is expected to close mid-year, must first clear regulatory hurdles and win shareholder approval. It will be several months after closing before the Ferris name disappears from customer account statements. Investors will continue to deal with their same brokers.
Ferris will become the seventh geographic region in Dain Rauscher's U.S. portfolio, providing it a base for expansion into the Mid-Atlantic. Dain Rauscher has 5,000 employees and $154 billion in assets under administration to Ferris' 900 employees and $18.5 billion in assets under administration.
The companies declined to disclose terms of the sale. Taft also said it is too early to say whether job reductions or management changes will result from merging the two firms. George M. Ferris Jr., Ferris' chairman, and Roger Calvert, its chief executive, declined to comment, a spokeswoman said yesterday.
George Ferris, who is 80 and owns about a quarter of the firm's shares, signaled the end was near in September when he told The Sun that at least four rivals were showing interest in a deal. The revelation came amid fallout from the stock manipulation scheme first disclosed in February 2007. The incident cost three executives their jobs and exposed Ferris to a lengthy federal investigation with an uncertain outcome. It remains embroiled in a legal tussle with victims of the fraud, who are still considering the firm's offer last month of more than $16 million in cash and stock to settle the matter.
Since then, an emerging bear market and potential recession have further weakened prospects for small brokerages, analysts said. The problem is especially acute for Ferris, which has stood still as others merged, invested in technology, embraced electronic trading and adapted to an industry landscape that favors bigger firms.
"People don't want to do deals, there are no IPOs and people are trading less, so there's just more stress and strain on everybody large and small," said Sanford Bragg, president of Integrity Research Associates, a New York financial services consulting firm.
Business officials lamented the loss of another Baltimore-bred firm but expressed hope that Dain Rauscher will maintain the same level of civic involvement as Ferris.
"We certainly are very proud of the homegrown companies that we've had in Baltimore ... but at the same time I think it [the sale of Ferris] is probably a natural consequence of this global economy that we're dealing with each and every day," said Donald C. Fry, president of the Greater Baltimore Committee.
Though its official headquarters is in Washington, the firm is chiefly associated with Baltimore, where most of its top executives and trading operations reside. Its predecessor, Baker, Watts, was founded in Baltimore and remained independent until lean times precipitated its merger with Washington-based Ferris & Co. in October 1988.
George Ferris brought with him a reputation as someone who ran a tight ship. And he was steadfast as competitors rushed to the Internet and bulked up through acquisitions.
What the firm lacked in flash, it made up for in its face-to-face, shoe-leather approach to dealing with clients. It promoted itself by having its brokers host radio shows on investing. The best-known was the late Julius M. Westheimer, who appeared regularly in radio, television and print to dispense investment advice.
"Change is our only certainty - T. Rowe said that," said Charles "Pete" W. Shaeffer Jr., a former Baker, Watts partner who is now a senior vice president and financial consultant with Dain Rauscher in Baltimore. "They failed to anticipate the changes that were coming and that they were going to have to respond to those changes."
The firm continues to enjoy a loyal following of mostly small retail customers stretching from Maryland to Michigan. Over the years it has carved out a niche issuing municipal bonds and doing stock placements for small- and mid-size companies. But that business is harder to find as fewer small companies go public.
Smaller firms such as Ferris have also been hurt by shrinking commissions for equity research and trading, industry analysts said. With revenue squeezed, regional brokerages have a tougher time absorbing the kind of legal and financial setbacks that have beset Ferris in recent years.
In 2000, the firm said it faced potentially $18 million in losses stemming from the failure of a Minneapolis stock clearinghouse called MJK Clearing Inc. It also has been hit during the past several years with a number of regulatory fines and arbitration awards to disgruntled clients that together cost well over $1 million.
The Sun reported in November that Ferris had joined a long list of financial institutions hurt by the subprime mortgage crisis, taking a $7.4 million loss on debt securities purchased by a bond trader who was subsequently fired.
But the worst of its troubles dates to 2003, when it hired Ohio broker Stephen J. Glantz, who in recent court appearances has admitted to having a history of drug abuse and a gambling addiction. Glantz brought with him client David A. Dadante, who managed a $47 million investment fund based in Ohio. The fund turned out to be a Ponzi scheme, in which money from new investors is used to pay phony "returns" to earlier investors.
Dadante used a combination of investor money and millions borrowed from Ferris to purchase a 35 percent stake in a Georgia company called Innotrac. With Glantz' help, he engaged in illegal trades that artificially inflated Innotrac's share price. Internal memos suggest Ferris' compliance department had concerns about the account in early 2003, but Dadante continued the fraud until investors in his fund uncovered it in late 2005. Both Glantz and Dadante have been sentenced to federal prison.
"It's not that the large investment banks don't have their woes as well," said Bragg, the industry analyst, referring to cases in which rogue brokers cause trouble for their firms. "It's just that when you have a smaller capital base, it's harder to absorb."
Taft said Dain Rauscher is satisfied that Ferris is close to resolving regulatory issues stemming from the incident with Dadante.
paul.adams@baltsun.com