When he was chief executive of Lehman Brothers, Dick Fuld oversaw a host of capital markets staff that underwrote stock and bond sales for the likes of Wal-Mart to General Electric. Bankers advised municipalities on interest-rate exposure, corporations on mergers and foreign governments on divestment. There were entire divisions that serviced the business- and capital-raising needs of their hedge-fund and private-equity clients. His legions of sales- and trading-staff talked hourly to every major investor in the world from its cavernous trading floors at 745 Seventh Avenue.
He saw and heard things that even the very well-connected simply wouldn’t. There were quiet meetings with Senators and key staffers on provisions of legislations that were beneficial to “the firm”; His opinion mattered on the board of the New York Fed; charities sought him and his checkbook for prestige; In a dozen different countries it was “first names only” with the men who moved markets and effected policy shifts.
In the truest sense of the word, though, he was in a club for almost 15-years that had perhaps several hundred other members.
Things have changed, however, since Lehman’s inglorious collapse in September 2008 for the 64-year old Fuld.
Evidence the first: Since May 6, Fuld has kept his Financial Industry Regulatory Authority license at a small firm located at 45 Broadway in Lower Manhattan called Legend Securities. Not to put too fine a point on it, the distance between the two offices is a lot more than the 4.1-miles Google Maps indicates.
[Fuld has not commented publicly on the move. I sent a detailed E-mail to his lawyer, Allen & Overy’s Patricia Hynes, but did not receive a reply. I spoke briefly to Fuld by phone at his Greenwich, Ct. house but he declined comment, citing pressing family business. Legend’s executive officers did not respond to repeated inquiries—including E-mails and voice messages at the firm and other places that their FINRA licenses indicate they have business interests.]
On Wall Street, a FINRA license is your ticket to conduct business with customers or trade on behalf a member firm. Where you keep your license is traditionally where you professionally hang your hat. This might be the exception though and here is why.
First, it is difficult to get a clear sense of Legend’s ownership structure.
The firm has had three separate corporate identities since its founding in 1998 [unlike Lehman, which kept the Lehman name in one form or another since its founding in 1850.] Filings indicate that an entity called The International Monetary Group—which appears to have no operations—currently controls 99% of Legend. In turn, The International Monetary Group is two-thirds owned by a corporation called StockTrade Network with the balance controlled by Legend chief technology officer Mark Sulavka and firm president Salvatore Caruso.
In 2006, StockTrade — whose primary operating asset is Legend and its securities operations— filed a prospectus to go public on the OTC Bulletin Board, listing firm chief executive Anthony Fusco as an almost 21% owner of the newly public firm, though it is unclear if the deal ever was completed. Nor is there any market for its shares at this point. StockTrade’s financials illustrate a venture that was embryonic, with $1.3-million in revenue and a $221,000 net loss.
Second, it is not really clear how Legend makes its money.
Despite a website that advertises a full-roster of “Institutional Services,” calls to Legend’s sell-side competition resulted in a fair amount of head-scratching. Spokesmen at three large, global investment bank’s who asked not to be identified given their firm’s long-standing policy of prohibiting comments on competitors, said their equity, option and corporate-bond trading desks had no electronic record of buying or selling securities where Legend was the counter-party. Two of these firms said their computer systems had no record of Legend at all.
Calls to a few hedge funds that are regularly active in the equity, equity-linked and corporate-credit sectors drew blanks; no one had heard of the firm.
There is business being done at Legend, to be clear, it just appears to be exceptionally different from the kind Lehman had ever done.
For a firm that lists five managers, Legend has a remarkably broad menu to offer the public: stocks, bonds, Ginnie Mae’s, collateralized mortgage obligations (mortgage-backed securities carved from mortgage-backed securities), private-placements, mutual funds, real estate investment trusts and municipal securities are just the begining. There is also life insurance, health insurance, 401(k) plans and tax help.
Like every other financial firm, Legend seeks to attract a high net-worth client base, though it is apparent that the more one studies it, the possibility of Legend having a broad-roster of clients with $10-million in assets ready to be put to work in the markets grows rather dim.
Like other brokers, Legend appears to generate a good slice of revenue from its network of “satellite” or “branch” locations. Unlike Lehman, these aren’t in Taipei, London and Chicago, but rather, Brooklyn, Las Vegas, Westfield, N.J., Staten Island (two offices), East Hampton, Stroudsburg, Pa., and Jasper, Indiana, a town that is about two-hours south of Indianapolis.
Public filings indicate Legend has done three investment banking transactions over the past year for OTC Bulletin-Board listed issuers: Ace Marketing & Promotions, ZTrim Holdings and Element 21Golf. Of the three, ZTrim and Element21 Golf have going concern language in their filings.
The OTC Bulletin Board market is, to be very charitable, a wild west of development stage companies, promotions, rigs, scams and the occasional honest-to-goodness operating company. [In contrast, Fuld sat on the board of the New York Stock Exchange--a market that has had its share of wild west moments too.]
As such, Legend’s job as banker to the corporate wing-and-a-prayer-set is fairly easy: Raise money and their clients stay alive until the next desperate capital-raising round. This also has the salutary benefit of (possibly) boosting the value of the handsomely-sized blocks of stock and warrants they take as payment for their services. A sample investment banking agreement is here.
Calls to the management of the three companies were not returned.
To be certain, Dick Fuld’s Lehman Brothers did dozens of deals that left much to be desired—Archstone-Smith is an especially lethal example— but the instances where its capital-raising efforts were central to keeping its client alive (and their compensation intact) were virtually non-existent.
Where things get rather interesting for Fuld and his battered reputation is Legend’s management and their reputations.
Based on Financial Industry Regulatory Authority (FINRA) BrokerCheck records, none of the Legend executives have even half of Fuld’s 40-plus years in the capital markets. In and of itself that’s no cause for concern; How and where firm management has spent time assuredly is though. Once the records of some of some of these places are seen in the broad daylight it is completely understandable why they exercised some selective discretion on the website.
For example, chief executive Anthony Fusco has left out his stops at notorious investor slaughterhouses L.T. Lawrence and Continental Broker-Dealer Corp. (L.T. Lawrence was tossed from the National Association of Securities Dealers—FINRA’s predecessor—and Continental is understandably classified as “inactive.”)
One career stop that his official biography does cite is Legend Securities’ former subsidiary Lieber & Weissman Securities LLC. Presumably Fusco was hoping that his prospective clients would not look into his BrokerCheck report. [Or Fusco may be wagering that Legend has the sort of clients that don't check up on those things or perhaps just don't care.]
The report spells out the 1999 censure that the Colorado Division of Securities placed on Lieber & Weissman for having unlicensed sales agents peddle securities to investors in the state. The settlement included having the firm’s principals–Legend’s website proudly notes that Fusco was one of the unit’s senior managers– sign a consent decree barring them and the firm from doing business in the state of Colorado. Fusco was named as a principal in the consent decree.
One-level up from this sort of sub-rosa drama is Legend president and chief financial officer Salvatore Caruso. A former bank branch-manager with dreams of peddling mortgage-backed securities to individual investors, Caruso doesn’t have any FINRA black marks, but he does have more than two years at American Investment Services, an Oklahoma City-based firm (1996-1998) that was expelled from the NASD in 2003 for a ream of violations. [Note: This isn't an exercise in the theory of "collective guilt." Of the 35 violations and arbitrations that the firm was enmeshed in, roughly half occurred during the two years he was there. Still, for a firm to get expelled in that period was no mean feat.]
Caruso, who is in charge of Legend’s compliance effort, does not have his stop at American Investment Services listed on the website’s biography.
Another Legend manager who might appreciate having some aspects of his background ignored is head trader Carl Martorano. His background includes, as the website notes, a 4 1/2-year tenure at Bear Stearns, but it also includes a two-year stop at Lexington Capital Partners & Co., a shop perhaps better known as First Hanover Securities, a firm that even if it hadn’t helped the leadership of the Gambino family diversify its revenue streams (see page 35; note that to the federal prosecutors, LCP and First Hanover are interchangeable, an understandable conclusion since they had the same NASD license number) had a fairly epic record of regulatory mayhem.
Martorano has a clean FINRA record but a broker or trader from First Hanover/LCP in the mid-1990s–the golden era of penny stock fraud–can surely tell a few tales. [I called Martorano for a comment and he declined, stating that he was going to have "someone" call me back. No one did.]
Fusco, Caruso and Martorano are of a part with the firm they run. They appear to be upstanding citizens of the capital markets but they have no shortage of breath-taking career stops. Indeed, it is unmistakeable: Legend has largely drawn its brokers, bankers and traders from the ranks of the dubious, the censured and the outright corrupt penny-stock brokerages of the recent past.
To illustrate this, I created an Excel spreadsheet with the names of over 30 current and former Legend employees (that is, those Legend employees that have or had brokerage licenses, more formally known as CRD’s) that I culled from various Internet searches. Click here to see it. Even if management had replied to my queries, spinning isn’t really an option: the firms in these broker’s backgrounds should cause the blood to chill. A.S. Goldmen, Hanover Sterling and Joseph Stevens, among others, were firm’s that perfected the black arts of client impoverishment.
A way of looking at this list in a charitable light is that the violations of Legend’s brokerage license holders are in the past, consigned to an era where the Securities and Exchange Commission and NASD-Regulation oversight was—if possible—even more passive than it is today. For years, churning accounts, unauthorized trading, dishonest and high-pressure sales practices, excessive mark-ups and the outright refusal to execute sales orders were all considered technical issues to be handled within the self-regulatory framework. That’s why the raping of the individual investor was a lucrative growth industry for much of the 1990s.
Moreover, those brokers appear to be playing by the rules at Legend, and save for one technical violation earlier this year, the firm’s record at FINRA and on PACER is clean.
The way it ought to be looked at, however, is that Legend is the penny-stock brokerage made modern. Its revenue-generating base is drawn not from the major brokers—whose “wealth advisors” now emphasize asset-management as the key to investment returns, rather than trading—that for all their own regulatory problems, spend hundreds of millions of dollars annually in training and compliance.
Building a success individual investor franchise has to be grueling work. It is, in a sense, all the stress of managing a hedge fund while acting as a market strategist and personal finance advisor across dozens of separate portfolios. No mean feat that.
Rather, Legend seems to have taken the easy road. It has grown from the legions of small client-trading shops and penny-stock brokerages that cluster around in lower Manhattan, New Jersey and Florida. These firms offer big commissions for their brokers to trade in low-priced stocks that their internal trading desks frequently control. Many of the brokers almost certainly knew each other from brokerages that were in varying degrees utter disasters.
Dick Fuld pays a lot of lawyers a lot of money to keep him economically and socially viable in spite of his many, many mistakes. If he was unwilling to do the necessary work himself to look into what he was becoming voluntarily affiliated with — even if in name only— then they should have done that for him.
It must be hard, very hard, for a fallen investment-banking titan to make his way in the day of the universal bank. The club he once stood astride longer than most is now closed to him and one-by-one, the trappings of real power and vestiges of a 40-year quest fall away. It has to be: Why else would a man lend his name and honor to men whom he would not have let near his building just two short years ago?