What the firm lacked in flash, it made up for in its face-to-face, shoe-leather approach to dealing with clients. It promoted itself by having its brokers host radio shows on investing. The best-known was the late Julius M. Westheimer, who appeared regularly in radio, television and print to dispense investment advice.
"Change is our only certainty - T. Rowe said that," said Charles "Pete" W. Shaeffer Jr., a former Baker, Watts partner who is now a senior vice president and financial consultant with Dain Rauscher in Baltimore. "They failed to anticipate the changes that were coming and that they were going to have to respond to those changes."
The firm continues to enjoy a loyal following of mostly small retail customers stretching from Maryland to Michigan. Over the years it has carved out a niche issuing municipal bonds and doing stock placements for small- and mid-size companies. But that business is harder to find as fewer small companies go public.
Smaller firms such as Ferris have also been hurt by shrinking commissions for equity research and trading, industry analysts said. With revenue squeezed, regional brokerages have a tougher time absorbing the kind of legal and financial setbacks that have beset Ferris in recent years.
In 2000, the firm said it faced potentially $18 million in losses stemming from the failure of a Minneapolis stock clearinghouse called MJK Clearing Inc. It also has been hit during the past several years with a number of regulatory fines and arbitration awards to disgruntled clients that together cost well over $1 million.
The Sun reported in November that Ferris had joined a long list of financial institutions hurt by the subprime mortgage crisis, taking a $7.4 million loss on debt securities purchased by a bond trader who was subsequently fired.
But the worst of its troubles dates to 2003, when it hired Ohio broker Stephen J. Glantz, who in recent court appearances has admitted to having a history of drug abuse and a gambling addiction. Glantz brought with him client David A. Dadante, who managed a $47 million investment fund based in Ohio. The fund turned out to be a Ponzi scheme, in which money from new investors is used to pay phony "returns" to earlier investors.
Dadante used a combination of investor money and millions borrowed from Ferris to purchase a 35 percent stake in a Georgia company called Innotrac. With Glantz' help, he engaged in illegal trades that artificially inflated Innotrac's share price. Internal memos suggest Ferris' compliance department had concerns about the account in early 2003, but Dadante continued the fraud until investors in his fund uncovered it in late 2005. Both Glantz and Dadante have been sentenced to federal prison.
"It's not that the large investment banks don't have their woes as well," said Bragg, the industry analyst, referring to cases in which rogue brokers cause trouble for their firms. "It's just that when you have a smaller capital base, it's harder to absorb."
Taft said Dain Rauscher is satisfied that Ferris is close to resolving regulatory issues stemming from the incident with Dadante.
paul.adams@baltsun.com
