Raymond James' profits were buffeted by higher legal bills as the firm braces for tougher regulations and higher litigation costs.
An additional $30 million was added to the firm's legal reserves, according to Raymond James' latest earnings report. “That rise, $30 million, was above normal,” confirmed CEO Paul Reilly during an earnings call with analysts. He did not offer more details.
A spokesman would not comment beyond Reilly's remarks on the call.
The firm is preparing for implementation of the fiduciary rule and is also facing a lawsuit from an SEC-appointed receiver related to an alleged $350 million fraud scheme involving a Vermont ski resort, immigrant investors and one of the firm's financial advisers.
In its earnings release, the firm’s private client group reported that pretax profits rose 6% to $73 million. Adviser ranks fell to 7,128 from 7,146 from the previous quarter. Reilly said this was due to a change in how the company counts its advisers; it now excludes non-producing branch managers.
COMPLIANCE COSTS ON THE RISE
Reilly did not disclose details of how the firm is preparing for the fiduciary rule during the earnings call, citing uncertainty around whether President Trump would delay or overturn the regulation. He also did not discuss pending litigation.
Raymond James is currently facing several lawsuits from investors seeking damages with regard to the firm’s alleged role in what the SEC says was a scheme to defraud foreign investors pursuing permanent residency in the U.S. through a special U.S. Citizenship and Immigration Service program.
The most significant of these lawsuits was filed in May 2016 by attorney Michael Goldberg, an SEC-appointed receiver for Jay Peak, a northern Vermont ski resort.
Goldberg, who is tasked with recovering lost investor funds, charges that Raymond James’ lax compliance allowed Ariel Quiros and William Stenger, executives and operators of Jay Peak, to engage in their alleged scheme to defraud the investors. Quiros had used brokerage accounts at Raymond James. Joel Burstein, a branch manager in Miami, is also named in the suit. According to court documents, Burstein was the son-in-law of Quiros.
Goldberg declined to comment.
The case is still pending. Raymond James is contesting the suit and others.
“While there can be no assurance that we will be successful, we intend to vigorously defend the claims against us,” the company said in a November SEC filing, which disclosed the lawsuits it was facing with regard to Jay Peak.
In April 2016, the SEC charged Quiros and Stenger with civil charges, alleging they engaged in an eight-year, $350 million scheme, making misleading and false statements to investors.
The SEC said Quiros, who served as chairman of Jay Peak, misappropriated funds for other projects as well as $50 million for personal expenses.
Quiros used accounts at Raymond James to perpetuate the scheme, and took out margin loans using investor funds as collateral in violation of the law, according to the SEC.
The regulator further alleged that Raymond James had permitted the fraud to be carried out due to lax compliance, and that the brokerage firm should have known that the investors' funds were not permitted to be used in such a manner.
Quiros, Burstein and their attorneys could not be reached for comment. Quiros recently denied the allegations in the SEC's civil charges case, according to court documents.
Stenger entered into a settlement agreement with the SEC in September, according to court documents. His attorney could not be reached for immediate comment.
Last year, Raymond James was also hit with large legal bills.
The St. Petersburg, Florida-based firm settled a related case with Vermont's securities regulator in July, agreeing to pay $5.95 million to resolve charges that it violated state law. The charges were related to the alleged fraud involving Jay Peak.
In May, FINRA fined Raymond James $17 million in fines for alleged failures in its anti-money laundering program. Jay Peak was not mentioned as part of that case. The regulator said the fines for "widespread failures" were the largest levied against a firm for anti-money laundering issues. In paying the regulator, Raymond James neither admitted nor denied the charges, per FINRA's statement at the time.
Raymond James reported that net income dropped to $146 million from $171 million for the previous quarter. Overall, net income was up 38% from $106 million for the year-ago period.
Acquisition-related expenses, driven by the addition of Deutsche Bank’s Private Client Services unit, renamed Alex. Brown, as well as of Canadian wealth manager MacDougall, MacDougall & MacTier, rose to $12.666 million, an increase of 577% from $1.872 million, the company said.
Companywide, Raymond James reported record net revenues of $1.49 billion, up 17% from $1.27 billion for the year ago period. Non-interest expenses rose 16% to $1.28 billion.