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.