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John Sykes’ JHS Capital Advisors challenged by annual losses, handful of Finra arbitration claims

John Sykes’ JHS Capital Advisors challenged by annual losses, handful of Finra arbitration claims

21:15 07 November in In the News

November 6, 2013
By Bruce Kelly, Investment News

As at his old firm, GunnAllen, B-D’s reps rely on stock, bond transactions but little fee business

Backed with hundreds of millions of dollars from owning a call center business, John Sykes entered the independent broker-dealer industry in the perilous market of 2008 brimming with confidence, brio and optimism.

It has been a struggle ever since that heady time for Mr. Sykes, who in January 2009 compared the potential of his first broker-dealer holding company, GunnAllen Holdings Inc., with industry stalwart Raymond James Financial Inc., both of which are based in the Tampa Bay, Fla., region.

But crushed by a burden of client litigation and failed investments, GunnAllen Financial Inc., the holding company’s broker-dealer, filed for bankruptcy protection in 2010, a few months after Mr. Sykes, 77, resigned as chairman.

Meanwhile, the share price of Raymond James has ascended steadily from $11.48 in March 2009 to around $45 a share as of Wednesday.


Before GunnAllen Financial went under, Mr. Sykes used the holding company, GunnAllen Holdings, to acquire a small broker-dealer called Pointe Capital Inc. in the summer of 2009.

After he resigned from GunnAllen’s board in December 2009, he bought Pointe from the stricken company and slapped his initials on the firm, creating JHS Capital Advisors. It has posted large annual losses ever since Mr. Sykes bought it.

With the hurdles of thin margins due to record-low interest rates and high compliance and technology costs, building a securities firm is capital intensive, industry observers noted.

But the ability of a firm and, more specifically, one wealthy individual to sustain such losses raises the question of how long those losses can be swallowed, said Jon Henschen, an industry recruiter who doesn’t work with JHS Capital.

“How much does [Mr. Sykes] not want to be a black hole, and how long will he sustain the support [for JHS Capital] before he grows weary?” Mr. Henshen asked.

Mr. Sykes didn’t return phone messages left on Wednesday.

Adding to potential expenses, JHS Capital also faces a handful of significant Financial Industry Regulatory Authority Inc. arbitration claims.

The firm lost a $1.9 million claim last year in which a broker was accused of trading excessively in a client account to generate commissions.

It faces three additional large claims seeking $4.5 million in damages, according to a court filing from October.

There are big risks associated with owning a small, independent broker-dealer, said Steven Insel, of counsel with Elkins Kalt Weintraub Reuben Gartside LLP and a veteran mergers-and-acquisitions attorney.

Mr. Sykes “may keep going if he wants to build a B-D [and] RIA firm with $100 million to $200 million” in gross revenue annually, Mr. Insel said.

“If that’s the vision, he may stick around,” Mr. Insel said.

“Small independent broker-dealers can make money, but it doesn’t take more than one bad branch office or a few bad brokers to cost you a lot because of the liability,” he said.


JHS Capital filed a complaint against its insurance broker, Wells Fargo Insurance Services USA Inc. in Circuit Court of Hillsborough County, Fla., alleging that it negligently failed to procure appropriate insurance coverage for the firm. JHS Capital is seeking damages, including those awarded by the Finra arbitration panel and attorney fees.

“The lawsuit, initiated by JHS, represents an insurance claim which would be proactively executed by any company as a standard course of business,” company spokeswoman Carol Graumann wrote in an e-mail.

“We disagree with the plaintiff and plan to vigorously defend our case,” Wells Fargo spokeswoman Katie Ellis wrote in an e-mail.

Mr. Sykes’ efforts with independent broker-dealers haven’t come cheaply, even for a businessman who Forbes estimated almost 20 years ago to have a net worth of $520 million.

Most of his wealth has come from the call center and business outsourcing company he founded, Sykes Enterprises Inc.

For 2010, 2011 and 2012, JHS Capital posted losses, respectively, of $7 million, $6.6 million and $6.4 million, according to the company’s annual Focus reports filed with the Securities and Exchange Commission.

To balance those losses, the company has made contributions of $22 million to its balance sheet over that three-year period.

In 2009, before the firm was sold to Mr. Sykes and during the darkest times of the financial crisis, JHS Capital, then called Pointe Capital, turned a profit of $262,000, according to SEC filings.

The firm is spending money in unusual ways for an independent broker-dealer.

It had lease commitments of $1 million this year. Small to midsize independent broker-dealers such as JHS Capital typically record much lower expenses for office space because its representatives and financial advisers are independent contractors and usually pay their own rent.

In 2009, before Mr. Sykes bought the firm, it recorded expenses of $108,000 for rent.

The firm stresses that it is in its early stages, when companies often require infusions of capital.

“Since its founding four years ago, by [Mr.] Sykes, JHS Capital Advisors has experienced a 66% increase in client assets. Suffice it to say, as a business in its early-growth stage, any capital reinvestment from management is rational and indicative of their long-term belief in the business,” Ms. Graumann wrote.

“JHS is very optimistic about the firm’s future and remains committed to continuing its strong growth pattern,” she wrote.

“Much of the time, a newer broker-dealer requires financial support for a few years,” Mr. Henschen said.

The firm has been able to increase revenue over the past few years. Last year, the firm’s revenue was $29 million, almost double the total two years earlier of $15.8 million.

Under Mr. Sykes, JHS Capital Advisors has made one significant acquisition. Last year, it acquired Paulson Investment Co.’s retail business, adding about 100 registered reps and advisers managing more than $2 billion in assets. That contributed significantly to the firm’s increase in revenue and assets, which total $3.5 billion.

According to company statements on its website, JHS Capital has added six advisers this year, including for its first office in Louisiana.

JHS Capital Advisors bears watching, Mr. Henschen said.

Like GunnAllen, JHS Capital has brokers that rely on stock and bond transactions and do little fee business.

GunnAllen was notorious for its high number of reps who needed special supervision because of records of sales problems.

Despite the large arbitration claims at the firm, this isn’t so with JHS Capital, Mr. Henschen said.

“I reviewed the reps, and there’s quite a few with clean compliance histories, and some with just one or two knocks,” he said. “That’s refreshing.”