A federal judge in Cleveland approved a settlement yesterday worth more than $16 million between Ferris, Baker Watts and victims of an investment fraud that was aided by a former Ferris broker.
The deal resolves disputes between the Baltimore brokerage and about 100 victims of the fraud, which grew out of a Ponzi scheme carried out by a former Ferris client, David A. Dadante. It also answers lingering questions about the firm's potential legal liability as it strives to complete its sale to Royal Bank of Canada in a stock deal valued at about $230 million. RBC required Ferris to set aside a reserve to pay potential claims as part of the sale agreement.
A spokeswoman for Ferris declined to comment on the settlement.
Dadante, who pleaded guilty and is serving a 13-year prison sentence, ran a $47 million investment fund that enticed investors with an elaborate lie. He used some of the proceeds to purchase and illegally manipulate the shares of a lightly traded technology company using accounts he opened at Ferris through a broker, Stephen J. Glantz. Glantz pleaded guilty to aiding the fraud and is serving 33 months in federal prison.
The fraud spawned a federal investigation that could result in a fine of more than $1.2 million by the Securities and Exchange Commission, according to a regulatory filing last week. The episode tarnished the firm's reputation and was a factor in its decision to sell to RBC.
Mark Dottore, a court-appointed receiver overseeing what remains of Dadante's investment fund, said that yesterday's court decision will remove some of the legal overhang surrounding Ferris' sale to RBC.
"It's good news for the investors, it's good news for Ferris," he said.
The deal calls for Ferris to pay investors $7.2 million in cash and relinquish nearly 3 million shares of Innotrac Corp. stock that Dadante bought using money partly borrowed from Ferris. Ferris also agreed to forgive Dadante's $9 million debt to the firm - money it potentially could have sought from the remaining assets of Dadante's fund.
Dottore said he hopes to sell the Innotrac shares and return the proceeds to Dandante's investors, who lost an estimated $28 million. The shares could be worth more than $9 million if Dottore can find someone willing to buy the entire stake.
Innotrac has few buyers in the open market, with little more than 5,000 shares changing hands on a typical day.