Focus Financial Partners is back on the acquisition trail, but a breach-of-contract lawsuit filed by one of its partner firms casts a negative light on the holding company of wealth management firms.

Launched in 2006, New York-based Focus has bought stakes in 18 wealth management firms with more than $31 billion in assets and more than 600 employees. Its stated value proposition is to provide firms with the technology, back office support and scale needed to grow their business while retaining their independence. The ultimate goal is to attain critical mass and take the entity public, resulting in a hoped-for jackpot for Focus' executives, private-equity backers and member firms.

In mid-November, Focus added its first major advisory firm in roughly a year when it brought Joel Isaacson & Co. into the fold. Isaacson, a leading registered investment advisory firm in New York City, has $3.5 billion in assets and is one of Focus' largest partnership deals to date. Focus typically purchases equity stakes of 40% to 70% in its partner firms.

Around that time, one of Focus' founding partner firms, StrategicPoint Investment Advisors in Providence, R.I., launched a lawsuit alleging breach of contract when Focus executives didn't allow StrategicPoint to fully examine its books.

The lawsuit was filed in Delaware Chancery Court by Progressive Financial Strategies, the management company that operates StrategicPoint. As described in the lawsuit, by mid-2009 Progressive grew concerned about several aspects of Focus' management and operations. For starters, they allege that Focus refused to provide any meaningful information about its continuing acquisitions or its overall financial position. As a result, Progressive couldn't determine the value of its ownership interest.

Additionally, says the lawsuit, Focus refused to disclose the amount of Progressive's ownership interest. Further, the Schedule K-1s provided by Focus listed Progressive's share of the profit, loss and capital as "various."

When a roll-up entity like Focus acquires multiple firms for cash and stock during the course of a year, it's natural for partners' ownership interest to change during the period. But one tax expert intimately familiar with K-1 reporting for private companies says partners typically are told what their stake in the company is at year-end. "When they put in 'various,' you are in trouble," this person says.

"One reason I filed the lawsuit was that I have minority shareholders and I have a fiduciary responsibility," says David Brochu, president and founding partner of StrategicPoint. "This is not a personal issue, it's a business issue."

Among other Progessive concerns: Focus wasn't adhering to its originally-stated guidelines for valuing its acquisitions based on earnings before owner's compensation (EBOC), and was paying higher multiples on EBOC on certain subsequent acquisitions in its quest to reach critical mass.

And Progressive says that recent acquisitions by Focus involved firms that generate a sizable portion of revenue from commissions, as opposed to fees. Progressive believes that sacrifices the long-term stability and value of the entity in favor of a short-term revenue boost.