Ferris missed a chance to act

The Baltimore Sun

David A. Dadante was making questionable stock trades almost immediately after Ferris Baker Watts took him on as a client in early 2003.

By May of that year, Ferris management was concerned enough to launch an internal investigation. By early 2004, Ferris Chief Executive Officer Roger L. Calvert was so worried that he stopped letting Dadante borrow new money from the firm to buy shares.

Too bad they didn't shut him down and call the cops. If they had, documents filed yesterday suggest, the brokerage wouldn't have gotten into deep trouble with regulators, probably wouldn't be selling itself to a rival and wouldn't be ending a century-old Baltimore story.

Don't worry about the bosses who allowed the shenanigans, however. Thanks in part to golden-parachute clauses that they "negotiated" after it became clear the firm was for sale, they'll do just fine. Do worry about the investors Dadante cheated, the philanthropies that might lose donations when local ownership ends and lower-level Ferris employees who might lose their jobs.

In August, Dadante pleaded guilty to securities violations and has admitted placing illegal stock orders that artificially inflated shares of Innotrac, a Georgia order-processing and logistics company. His Ferris broker, Stephen J. Glantz, has pleaded guilty to aiding the fraud. Both are in federal prison.

Ferris is being sold to Royal Bank of Canada, which will combine the firm with its RBC Dain Rauscher money-management operation, for about $230 million. At 1.7 times book value, that's not a bad price in an unsettled landscape. But it's not a home run, either. In the 1990s, Baltimore's Alex. Brown sold to Bankers Trust for a fabulous 3 times book.

The Dadante fiasco cost Ferris millions in legal fees, costs of internal inquiries and uncollectible margin loans because management let Dadante continue trading after its own internal watchdogs had warned he was a problem.

The Securities and Exchange Commission and the Justice Department continue to probe the Dadante matter. Three former Ferris executives resigned or retired after the scope of the problem became clear, including general counsel Theodore Urban and Vice Chairman Louis J. Akers Jr.

Documents filed yesterday with the SEC note "continuing pressures" relating to civil and criminal investigations as big reasons for selling the company.

True, there were other reasons to sell. With tighter profit margins in the money-management trade, it's hard for middling firms like Ferris to thrive. It's also difficult to afford increasingly expensive regulatory costs. Company Chairman George M. Ferris Jr. is getting up in years, and selling the brokerage will help him tidy up his estate.

But the federal probes were a critical blow. Like SafeNet Inc., PHH Corp. and other companies whose solution to regulatory problems was seeking a merger partner, Ferris is pulling down the curtain before the play is over. (PHH's merger ultimately failed, however.)

Ferris is being sued by people who invested in Dadante's Ohio-based fund, IPOF. In January, Ferris agreed to surrender Innotrac shares to IPOF's receiver and pay fund investors $7.2 million. It will probably pay a penalty of at least $1.2 million to the SEC, according to yesterday's filing.

It is "reasonably possible," the firm added, that the SEC will pursue claims against current or former Ferris executives. If that happens, the firm must pay their legal costs. And if regulators choose to litigate the matter instead of negotiating a settlement, the firm said, "costs of defense could be materially greater."

Many Ferris employees will do well. Chairman Ferris walks away with $50 million in exchange for firm stock. CEO Calvert gets $7 million, including a change-in-control payment of $2.5 million. Executive Vice President Patrick Vaughan gets at least $4 million to stay on as head of Dain Rauscher's regional operations plus change-of-control pay.

RBC set up a "retention pool" of up to $97 million to make sure star Ferris brokers don't walk across the street to work for Stifel Nicolaus or Smith Barney. Lower-level workers will share in the buyout because Ferris is organized under an employee stock ownership plan.

But something has been lost, and not just the heritage of a firm that survived the Great Depression. One way RBC will make the deal pay is by cutting costs, possibly by laying off Baltimore employees.

The executives at the top of the company, however - the ones in charge when the Dadante mess when down - set up soft landing pads for themselves. Less than two weeks after George Ferris told me in September that "we have not changed our viewpoint" on wanting to stay independent, the firm reached "change of control" deals with top suits that would pay off if it got sold, the SEC filings show. They pay three times yearly compensation plus benefits.

Guess they changed their viewpoint pretty quickly. If the Dadante problem is one big reason Ferris is selling to RBC, then executives are getting rewarded for their own bad management.


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