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THE WOLF OF WALL MAIN STREET
By Philip J. Koehler, Esq.
May 2014

Located where Interstate 35 and Interstate 80 meet, just west of Des Moines, lies the town of Clive, Iowa, population 15,447.  It boasts lodgings like Best Western, Courtyard by Marriott and LaQuinta Inn.  For fine dining, there’s everything from Appleby’s to Zuzap Thai Cuisine.  I’ve never been to Clive.  It sounds neighborly, wholesome and safe.  I imagine that if you live there and saw the movie “The Wolf of Wall Street,” you’d think the monstrous behavior of Jordan Belfort (a real life character portrayed by Leonardo DiCaprio) is one more tale of unbridled greed that could only happen on Wall Street.

Through his B-D firm with the respectable sounding name of Stratton Oakmont, Belfort ran a high pressure pump-and-dump scam operation churning penny stocks for 50% commissions.  SPOILER ALERT:  Belfort becomes fantastically wealthy, but loses it all after he’s arrested on a bevy of securities fraud charges and pleads out to receive a 36-month sentence in a minimum security correctional facility.  At one point in the movie, after proclaiming his obsession with a long list of illegal substances, Belfort holds up a $100 bill, looks straight into the camera and says with a smirk:

“[T]here is one that is my absolute favorite. See, enough of this should make you invincible, able to conquer the world, and eviscerate your enemies. And I’m not talking about this [drugs]. I’m talking about this. See, money doesn’t just buy you a better life …. it also makes you a better person. You can give generously to the church of your choice or the political party. You can save the [bleeping] spotted owl with money.”

Unlike Jordan Belfort, a native New Yorker,  Donald DeWaay, Jr. grew up in Rock Rapids, Iowa, far from the push and shove of big cities.  According to his advisory firm’s website, he has a passion for the environment and Iowa’s agricultural heritage and received conservation awards for the work he did to improve his family’s farmland. He sat on the Board of Directors of Trees Forever, a non-profit group that focuses on urban tree planting programs to help eliminate farmland erosion and runoff.  On the surface, Belfort and DeWaay are totally different…except when they’re not.

In 2006, DeWaay formed a family of seventeen companies, including a B-D firm, DeWaay Financial Network LLC, which went out of business less than six years later.  According to the firm’s FINRA disclosure, affiliates included two RIAs, Dewaay Capital Management LLC and Dewaay Advisory LLC, a pension TPA, DeWaay Benefit Administrators LLC, DeWaay Insurance Agency, which sold variable annuity contracts and other insurance products, as well as DeWaay Real Estate Management LLC and DeWaay Assisted Living LLC, which owned and operated various commercial properties.  He also formed DeWaay Resource Management Group LP and Fine Wine Direct LLC, which both focused on wine and spirits.   In his spare time, DeWaay looked for opportunities to purchase liquidated assets, like delinquent equipment leases, bundle and resell them.  He dreamed that his business would one day be recognized as the “Mayo Clinic of wealth management.” To crown his achievement, he built a sprawling 106,000 sq. ft. headquarters in Clive to a house a workforce that never exceeded 50 employees.  The website quotes DeWaay as follows:

“I love what I do and it shows.  Since I entered the industry my driving ambition has been to create the nation’s premiere financial advisory firm.  A firm with powerful resources most attribute only to the giant financial heavyweights yet refined enough to deliver services in a personal manner reflecting my Midwest values and respect for the individual needs and personalities of each client.  DeWaay Capital Management is the embodiment of my dreams.  I invite you to get to know DeWaay Capital Management better and perhaps you’ll discover a new home for your future.”

Before it was rocked by investor law suits in 2011 seeking $30 million in damages stemming mostly from the failures of high risk private placements and real estate deals, DeWaay’s B-D firm booked sales revenue that ranged from $8.5 million in 2007 to $16.7 million in 2010, on which the brokers were paid total commissions of 55% and 84% respectively.  In its heyday, the DeWaay Financial Network claimed to have the three top selling brokers in the country, including DeWaay, each of whom demanded commissions as high as 95% on private placements and REITs that would shortly go BK.  The November 18, 2012 edition of InvestmentNews claimed that “[His] turbocharged approach to peddling product…is destined to end up on the wrong side of broker-dealer history.”

Last year DeWaay proposed to settle all claims for $3 million, most of which would be paid by insurance companies.  Many investors were irate at such a paltry sum.  The bankruptcy trustee appointed to settle claims against all broker-dealers, including DeWaay Financial Network, resulting from the bankruptcy of a real estate investment trust objected to the proposed settlement, arguing that DeWaay could face nearly $20 million in claims from an estimated 273 clients.  According to the trustee, DeWaay seeks to walk away from these claims and hold onto to “two vacation homes, investments in certain limited partnerships valued at more than $800,000, an investment account worth $1.83 million” as well as his advisory business and the TPA, which are still going concerns.  This hardly exhibits DeWaay’s alleged “Midwest values,” let alone “respect for the individual needs of each client.”  Of the hundreds of former clients who brought claims, many may well need the services of the real Mayo Clinic to deal with the enormity of their losses.  DeWaay’s reaction smacks of Jordan Belfort far more than the Iowa-farm-boy-made-good they thought they knew.

Last month another shoe dropped.  The Employee Benefit Security Administration announced that DeWaay made up $341,487 in fee overcharges to 68 ERISA covered pension plans that were clients of the TPA firm and agreed to pay up to an additional $212,727 over the next five years to other ERISA plans that engaged the advisory firm.  The EBSA’s investigation found that DeWaay and its entities violated ERISA by recommending certain inappropriate, high risk private placement investments to plan participants between 2007 and 2011.  EBSA investigators also found that DeWaay affiliates charged the plans higher fees than they were entitled to under applicable service provider agreements and made investment recommendations that resulted in DeWaay affiliates receiving commissions from third parties.

“The law clearly states that an advisor who accepts a fee to give investment advice to a retirement plan must act solely in the best interests of plan participants,” said Assistant Secretary of Labor, Phyllis Borzi. “By ignoring the best interests of those participants, [DeWaay] in this case didn’t simply violate the law, [he] violated the faith of conscientious workers who trusted DeWaay and his employees to help them prepare for retirement.”

Every emperor it seems needs a palace and DeWaay’s dreams of grandeur didn’t lack for originality when it came to building his.  Construction began in 2007 shortly after he got the B-D firm running, with masons painstakingly handcrafting interior accent columns using tons of expensive stone from the Black Hills.  The main 100,000+ square-foot building, which includes a state-of-the-art conference center seating up to 200 people, was the first of five structures he planned to make up “Commerce Park by DeWaay.”  There was also a retail plaza, as well as another 16,800 square-foot office building intended to house professional firms that DeWaay expected to affiliate with his firms to offer clients a one-stop financial center.  By 2010 cost overruns had driven the total investment in the project to almost $20 million and DeWaay began draining the advisory firm and shifting money to three separate limited partnerships in order to pay the inflated mortgage, as property values in Clive were tanking.

Needless to say, the self-proclaimed financial guru didn’t foresee that this mortgaged-to-the-hilt monument to his ego would become the single largest threat to his “Mayo Clinic.”  Press reports indicate DeWaay is still operating his RIA and TPA hoping he can survive the litigation and resurrect his dream.   Even Belfort, who never operated an RIA or managed the assets of a pension plan, knew when the end had finally come.

So what is the takeaway here for Plan Sponsors?  How can they protect themselves and plan participants from the Jordan Belfort or Don DeWaay wanna-bees who will always be out there without relying on the EBSA to come to their aid?   First, Plan Sponsors should select fiduciary and nonfiduciary service providers through an established RFP process that, in addition to fee considerations, subjects each candidate firm to:

  1. A thorough background check of each owner to insure that he or she has a substantial history in the industry, relevant educational background and no prior black marks;
  2. An independence check to ferret out the ownership, business referral and other relationships to all other candidates;
  3. A review of the firm’s audited financial statements and credit rating; and
  4. A review of the firm’s management succession plan; continuing education programs and individual professional work/case loads targets.

Before considering fees, a reasonable RFP process should exclude any candidate that (i) does not publicly disclose on its website the individual biographies of each owner and their respective interests in other business entities, (ii) is affiliated with any other entity providing services to the plan, (iii) does not provide adequate documentation that shows a history of maintaining a healthy financial condition and credit rating, (iii) fails to maintain solid management succession plans and continuing education programs and (iv) does not impose reasonable workload limits on its client relations/technical staff.   Plans that have adopted an Investment Policy Statement should always obtain verification from each candidate that it agrees to conform its advice to implement the policy.  A closely held, debt-burdened, diverse business enterprise, with a brief history, like DeWaay’s, which combined a TPA, an RIA and a B-D, was notably inappropriate on many levels.

Second, when considering investment advisors, certification agencies like DALBAR and CEFEX add an extra layer of vetting to this process, which should be given significant weight.  For example, DALBAR recently initiated a program called “401k right,” which is an outreach to plan sponsors to raise the awareness of the critical importance of checking the credentials of all experts who provide services to their plans.  More information is available at www.FiduciaryStandardsBoard.org.  There is also a new firm, InHub, which has launched an online RFP process called “eRFP.”  Located in Chicago, InHub’s proprietary eRFP technology guides plan sponsors through the proposal process with greater efficiency.  See www.theinhub.com.

For all their differences, Jordan Belfort’s favorite drug got the best of Don DeWaay as well.  Neither one was the first to succumb and certainly won’t be the last.  Plan Sponsors should be sophisticated enough to see that firms that bundle advisory, B-D and TPA services are fraught with internal conflicts that create complex fiduciary oversight demands/risks that can otherwise be avoided by maintaining a rigorous independence policy.  Closely held, regional firms, like DeWaay’s are particularly troublesome because the revenue from brokerage commissions and advisor asset-based fees invariably dwarf the revenue from the TPA.  History shows that tension will always exist between maximizing firm income and the RIA’s ERISA fiduciary responsibilities and the narrower the base of ownership the more likely the integrity of the TPA’s operations will be compromised to support the firm’s overall profit-making objective.