Cetera branch fighting Avantax lawsuit as M&A deal moves forward

Even though Avantax is slated to fold into Cetera Financial Group by the end of the year, the two firms remain embroiled — at least for now — in a recruiting and trade secrets lawsuit.

Los Angeles-based Cetera Holdings secured an agreement last month to acquire Dallas-based Avantax for $1.2 billion and take the firm private. However, Avantax's parent company had sued Cetera Financial Specialists, Cetera Investment Advisers, Farpointe Wealth Partners — a major branch of Cetera with 13 offices and its headquarters in Southlake, Texas — plus four Farpointe executives in December 2021 based on allegations of tortious interference, misappropriation of trade secrets and confidential information and conspiracy. In the civil case in Dallas County Court, Farpointe has filed counterclaims accusing Avantax Wealth Management, Avantax's parent company, of bad faith.

The firm "brought the instant suit to circumvent mandatory FINRA arbitration and harass the defendants," according to Farpointe's filing. "Avantax, the true party in interest, is a broker-dealer and a FINRA member firm. Any claims arising out of the securities business activities of Avantax or its [financial professionals] are subject to FINRA's mandatory industry arbitration. Any disputes between Avantax and another brokerage firm are also subject to required industry arbitration."

"Avantax knew its claims were subject to binding arbitration and chose to circumvent FINRA rules and its ethical obligations to follow those rules," the Aug. 25 filing continued. "Avantax had its parent company [Avantax Wealth Management] bring suit against defendants in bad faith in order to bypass the well-established FINRA rules compelling arbitration, and to delay and harass defendants through unwarranted court proceedings, improper delays and obstructive conduct in the course of the proceedings."

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In a Sept. 25 filing two weeks after the announcement of the Cetera deal, Avantax Wealth Management denied Farpointe's allegations. Avantax's parent company had alleged in its lawsuit that Farpointe improperly used confidential trade secrets to recruit Avantax financial advisors to the branch and the Cetera-owned brokerage and registered investment advisory firms. As a fellow tax-focused wealth management firm, Cetera Financial Specialists had been one of Avantax's biggest rivals before the impending acquisition.

None of the parties in the lawsuit answered Financial Planning's question about what will become of the case after Avantax merges into Cetera. Representatives for Avantax didn't respond to requests for comment, and representatives for Cetera and Farpointe declined to discuss the pending lawsuit.

While AdvisorLaw President Dochtor Kennedy said he has no specific knowledge about the Cetera-Avantax deal, he noted in an interview that there are "always funds that are earmarked" by sellers for potential legal liabilities as part of M&A negotiations.

"If I buy your company, I'm buying your trade secrets, too," Kennedy said. "It's just the reality of things. There's no longer a claim. The claim is moot at that point."

Avantax made no mention in a large proxy report about the deal earlier this month of Farpointe or the lawsuit. Executives from Genstar Capital, the private equity firm that's the majority owner of Cetera, first met with senior management of Avantax last March at the beginning of a competitive bidding process undertaken by the eventual seller with help from its legal and financial counsels, according to the document. 

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In one section of interest to the more than 3,000 financial advisors with Avantax wondering whether they'll receive offers of bonuses for remaining with the firm through the transition to Cetera, the company noted that part of the debt proceeds financing the deal will "fund retention loans for certain personnel associated with Avantax or its subsidiaries." In another, the company noted the "golden parachute compensation" upon the close of the deal of $21.6 million for Avantax CEO Chris Walters, $6.1 million for President Todd Mackay, $5.4 million for Chief Financial Officer Marc Mehlman and $1.9 million for Chief Legal Officer Tabitha Bailey.

The firm will hold a special meeting of stockholders to vote on the deal on Nov. 21. In Avantax Wealth Management's case against Farpointe, lawyers for the parties agreed to meet on Nov. 3 "to discuss and resolve all pending discovery disputes" left in question after a session this week.