For more than five years, the details of the ongoing dispute between co-founders Mark Hurley and private investor Howard Milstein over the sale of Fiduciary Network have been under wraps. But last month, a New York Supreme Court judge ordered the court records unsealed, and the advisory community can finally see how the dynamic between the partners-turned-public adversaries played out.

Attempts to reach Milstein, Barry Friedberg, appointed by Milstein to serve on the Fiduciary Network board, and Karl Heckenberg, currently CEO of Emigrant Partners and the Fiduciary Network, for comment were unsuccessful by press time.

According to Hurley’s attorney William A. Brewer III, the judge’s support of the arbitration details entering the public domain in itself was a victory. “That record confirms what our clients alleged all along: certain defendants were conspiring to subvert the sales process of Fiduciary Network and smear Hurley's personal and professional reputation,” Brewer said in a statement.

Hurley lauded the financial performance of FN during his tenure as CEO and after he was terminated in 2018. “I am proud of our track record, and believe our management team provided an enormous investment return to Mr. Milstein – achieving astronomical results in his equity investment in FN,” Hurley said. In the LLC agreement, it stated that Milstein's initial capital contribution was $75,000 and an expert witness said that investment was ultimately worth $600 million, or 8,000 times his investment.

However, no damages were awarded for legal reasons. Financially, the arbitration was a draw, including the assignation of court costs and fees, the unsealed documents showed. In the end, the arbitrators agreed with Hurley that Milstein and actors on his behalf had done what they could to suppress the sale price of Fiduciary Network (FN), but decided not to award damages.

The arbitrators said Milstein and his team acted with spite and engaged in a calculated process, using two industry publications to subvert the sales process while denigrating Hurley and his management team.

The case is still pending appeal in New York state court. “Our clients believe the arbitration panel misapplied Delaware law, to the extent it failed to award damages despite its having found ‘actionable wrongdoing’ on the part of one of the conspirators,” Brewer’s statement continued. “Our clients are exploring all options to hold defendants accountable.”

The battle included three separate arbitrations with the two co-founders, two holding companies and five named managers, but there were two facets to this case that all parties could agree on, the documents showed.

First, the LLC agreement that Hurley and real estate investor Milstein signed when they became partners in July 2006 was replaced with amendments three times, once in 2009, once in 2011 and finally in July 2016. It was that last version that provided the language against which all claims and counterclaims were evaluated. And the second facet was that the catalyst for the drawn-out arbitration brawl came in December 2016, when Hurley exercised his right to force a sale of FN.

In an industry where RIA consolidation is now an ongoing event, there was a time before the 2008 financial crisis when two firms were the leading investors in the space: Fiduciary Network and Focus Financial Partners. In that context, what Hurley (and three of his colleagues) and Milstein (through Emigrant Bank and EB Safe, an Emigrant company set up to take the majority stake in FN) wanted to do was innovative.

But the first inkling that the relationship between the two partners might fray came soon after the founding of the acquisition company. According to court documents, Hurley’s original vision had been that FN would purchase 100% of the equity of small wealth management firms. Hurley himself had a 19% ownership, one of the documents said. But Milstein’s intention was different. Milstein’s 75% ownership was held through Emigrant Bank/EB Safe, and he wanted FN to structure the investments not as equity but as transition-financing debt held by Emigrant, which reduced the number of wealth management firms FN could target from approximately 18,000 to about 400, the document said. (The remaining 6% ownership was held by FN management.)

Ultimately Hurley acquiesced and accepted Milstein's plan and, from 2007 on, publicly stated numerous times that minority equity stakes acquired with debt was the plan. But when the LLC agreement allowed Hurley to get out of the deal in December 2016 by forcing a sale, he did just that.

The process for sale had been laid out in the LLC agreement as follows: If Hurley forced a sale, Milstein (through Emigrant/EB Safe) could exercise a call right prior to the selection of a banker, or by making an offer to Hurley and other management to purchase the remaining 25%. If Milstein didn’t exercise the call, or made an offer that was rejected, then an investment bank would be engaged for the sale and a negotiating committee would evaluate the offers, with the highest bidder winning.

However, Milstein then had one more shot at acquiring the 25% stake at a price corresponding to that highest qualifying bid under a right of first refusal, plus a 10% break-up fee for the winning bidder.

After Hurley gave written notice he was exercising his forced sale right, EB Safe initially waived its call right, but then initiated the first arbitration to reclaim that right as FN moved on to find an investment bank. The first tribunal’s decision in August 2017 allowed the sale to go forward but declared that EB Safe’s call right could be reinstated in August 2018 if the sale process, which was to take 12 months, was not successful. And that’s when the acrimony started heating up, the documents indicated.

Between August 2017 and the next arbitration four months later, the two sides disagreed on who the investment banker would be, the role of the FN Board and the negotiating committee, the kinds of disclosures that would be made to bankers in the running, the format of choosing a banker (one side wanted to subject candidates to a “bake-off”), and, most importantly, the method of valuation for FN, according to the documents, as Hurley argued that Milstein was now had the incentive to get the lowest price possible for FN.

In November 2017, another Emigrant Bank-launched company called HPM Partners sold for $77.1 million, or 29.73x EBITDA. This was a registered investment advisor and a stand-alone wealth management business that was intended to be a firm aggregator like FN.

According to Hurley, the two businesses were enough alike that the HPM valuation could apply to FN. According to Milstein/EB Safe, HPM was a wealth manager and not a specialty lender to wealth managers, so the multiple was immaterial. The panel ruled that the two businesses were comparable and that the valuations should have been disclosed to the investment banker.

In addition to these disagreements, both sides were quoted in the financial press in ways the other side found objectionable, including the dissemination of a lowball valuation for FN of $70 million to $80 million.

The second arbitration was initiated in December 2017, again by EB Safe and this time to prevent Hurley from participating in various aspects of the sale process. The second tribunal found in Hurley’s favor and allowed the 12-month clock on the sale process to start again.

In February 2018, Milstein directed EB Safe management to make it known that Hurley had been arrested on domestic violence charges during a messy divorce and that the information should be disclosed to potential bidders, along with a memo that painted Hurley in an unfavorable light as a manager. The charges subsequently were dropped and expunged. Twelve days after "the arrest" occurred, Hurley received joint custody of five young children. And finally, after the final bids were in and InterPrivate/Bain was deemed the high bidder with a $140 million purchase price, EB Safe refused to grant releases for potential claims against the buyers and FN. For that, InterPrivate/Bain revised its offer to $110 million.

Estimates around that time put the value of FN anywhere from $300 million to $500 million, certainly above $110 million. At that point, however, Milstein/EB Safe exercised its right of first refusal, bought the remaining piece of FN in November 2018 for an undisclosed amount (although 25% of $110 million is $27.5 million), and fired Hurley and FN management.

The third arbitration was initiated by Hurley, asking for more than $150 million in damages, forfeiture and disgorgement of profits, interest, reasonable attorneys’ fees and other costs. The 84-page award can be summarized as follows:

“The totality of actions taken by Respondents during the Sale Process strongly suggest an intent to subvert the Sale Process for the purpose of suppressing the sale price of FN so that EB Safe could, upon the exercise of the [Right of First Refusal], acquire FN at a price lower than that at which FN could have been acquired but for the conduct of Respondents,” the arbitrators found.

An additional paragraph called out Milstein for specific actions designed to derail the sale. However, the tribunal was unable to assign responsibility, and therefore damages, to any of the respondents because a crucial paragraph in the LLC Agreement absolved EB Safe and management from any duties not expressly assigned—and none were. Only one manager could be determined to have not acted in good faith under the agreement. But when it came time to levy damages the tribunal said there had been no attempt by Hurley to allocate damages among the “bad acts” or the actors. Left with speculation as to what that manager’s portion of damages would be, the tribunal declined to assign any at all.

Looking at the bigger picture, it’s possible that the long war over FN impacted the company's performance. At its peak, FN had bought minority stakes in 17 wealth management firms, including some of the top RIA firms in the industry. And while Karl Heckenberg early last year said Emigrant Partners, which was established to acquire hybrid RIAs, and FN, which invests solely in fee-only RIAs, were both viable as parallel businesses, it’s unclear how many companies remain under the FN banner.

Meanwhile, other, similar private equity-backed consolidators have enjoyed real success in growing their businesses. Focus Financial, for example, continued to expand its network and went public in 2018. However, Focus shares have fluctuated and failed to appreciate significantly from their price after the August 2018 IPO. In recent months, both Dynasty Partners and CI Financial have filed to go public.

Indeed, CI Financial has emerged as one of the biggest aggregators in the industry, going on a buying frenzy grabbing more than $100 billion in assets under management. Significantly, CI has bought at least four of FN’s firms in the last year.

Disclosure: Hurley has been a frequent contributor to Financial Advisor. Milstein, who together with others executives at his New York Private Bank & Trust, was the subject of a cover story in Financial Advisor’s sister publication, Private Wealth.