RIA ordered to pay $29M over U5 defamation case

A registered investment advisory firm is facing a jury verdict ordering it to pay former financial advisors and a portfolio manager a combined $29.3 million for defamation and interference.

Advisors William and Brian Vescio and portfolio manager Kathryn Constantakis won the decision last month in a Pittsburgh state court. They lodged the case against Canonsburg, Pennsylvania-based Bryan Advisory Services and its principals over the firm's 2021 termination of them and a Form U5 filing alleging they had violated their fiduciary responsibility with intent to defraud clients by sending the customers invoices from a new RIA they had yet to leave Bryan Advisory to form on their own, court records showed. The Vescios, a father-son duo, and Constantakis denied they had ever sent the bills and accused their former RIA of defaming them in an effort to retain their substantial client base before they could launch a new firm.

"Firms are required to submit the form and provide accurate, correct information," said Alan Besnoff, the founder of Securities Expert Witness & Litigation Support and a FINRA arbitrator who appeared as an expert witness for the plaintiffs in the case. "Very importantly, clients and prospective clients use the information through the BrokerCheck and IAPD [Investment Adviser Public Disclosure] reports to make decisions about who they want to be their financial advisor. I explained that firms, at times, weaponize the Form U5 for the purpose of having an unfair competitive advantage in competing for the clients' business, or it can be done for malicious or retaliatory purposes and, of course, that would be prohibited. I think anybody can understand that and the tremendous harm that can do to a financial advisor's reputation."

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Reached by phone at the firm, Bryan Advisory owner Richard G. Bryan declined to comment on the case, citing ongoing litigation. His attorney didn't respond to an email or a phone call. 

The RIA had denied the plaintiffs' allegations and filed its own counterclaim against Constantakis and the Vescios that resulted in the jury holding the elder advisor, William Vescio, liable for a payment of $65,000 based on the firm's claims of breach of contract, intentional misrepresentation and tortious interference with contractual relations. The jury rejected its case against Vescio's son Brian and Constantakis, as well as a claim of fraud against William Vescio.

"Defendant Bryan Advisory Services had an obligation to report its good faith belief that [the] plaintiffs violated applicable laws and regulations," the company said in its filing in response to the lawsuit.

To Besnoff, the case and another one earlier this year decided in a FINRA arbitration award requiring Northwestern Mutual to pay damages of $8 million represent a trend of "guilt by association" in which Form U5 allegations against one member of a small team extend to others who may or may not have anything to do with them. For big wealth management firms hit with payments of hundreds of thousands or several millions of dollars, the notable U5 defamation cases in recent years reflect an opposite swing toward too many complaints against the largest brokerages and other members of the Securities Industry and Financial Markets Association.

"Firms who are diligent in making accurate and complete U5 filings nevertheless face unfounded U5 defamation claims — and increasingly awards — for money damages in FINRA arbitration," SIFMA Deputy General Counsel Kevin Carroll wrote to FINRA in February. "The proliferation of these claims further incentivizes the filing of even frivolous defamation actions, given the potential for large, yet unfounded awards. It also incentivizes firms to make their U5 disclosures as narrow, limited and bare bones as possible (but consistent with regulatory requirements) to minimize their legal exposure."

The Vescio case involved U5 allegations, but it proceeded after the 2021 filing of the case in state court rather than FINRA arbitration because Bryan Advisory is an RIA.

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The Vescios and Constantakis had previously worked for Bryan Advisory in providing investment management services to a book of clients that eventually topped $200 million in client assets, with its largest clients being pension funds for municipal and county governments, according to the Vescios' complaint. They shared 10% of their advisory fees with Bryan Advisory in exchange for compliance oversight, billing and other services, but they found the RIA to be "regularly delinquent in transferring collected fees" and displaying "inattention to and inaccuracies in other compliance duties," the document stated. Around December 2020, they decided to start their own RIA. The following month, they created a template invoice for clients.

Bryan Advisory accused the Vescios of sending the invoice to clients and subsequently fired the Vescios and Constantakis. The U5 alleged that they used "a deceptive and misleading" document from Vescio Asset Management as "an unregistered and unlicensed advisor entity and requesting funds be paid to that unregistered and unlicensed advisor entity" and referred to a 2020 SEC settlement that was not at issue in the case, the complaint stated.

The U5 language "was not only defamatory but it was false, and they had a very difficult time trying to convince people that it was not false," said John Caputo of John A. Caputo & Associates, which represented the Vescios in the case

"It was clear to the Bryans that the Vescios were going to seek RIA status and they would not need Bryan Advisory, and they didn't like it," he said. "They had to stop them in some way so that they would have the opportunity to keep the clients."

Constantakis had filed her own case, which later got combined with that of the Vescios, according to her attorney, Nicole Daller of the Horne Daller law firm.

"In all the time since then, there's never been a shred of evidence that those were ever sent," Daller said, citing testimony in the case from former clients that they had never received the Vescio Asset Management bills. "It was very clear that the U5s were weaponized for an improper purpose."

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The verdict obligated Bryan Advisory and employees of the firm to pay $16.35 million to the Vescios in connection with their allegations of tortious interference with contractual relations and defamation and another $13.02 million to Constantakis on those claims. The judgment of $65,000 against the elder Vescio amounted to a message from the jury "that Bill didn't handle things perfectly and there was a misstep here and there, but it wasn't serious," Caputo said.

A book of clients that had once added up to $235 million had dwindled to a base of less than $1 million by the time the Vescios got their separate RIA up and running, according to their lawyer.

"The strength of Vescio Asset Management was that he, not Bryan Advisory, had these clients for many years and they knew and trusted him," Caputo said. "When they hear that their investment manager was accused of fraud, they then transfer the assets to another manager."

Constantakis has since moved on to her current role at TIAA after a stint at the Vescios' RIA and another firm, according to her registration with the Securities and Exchange Commission.

"It was so clearly obvious that this was done for a really wicked purpose," Daller said. "It was about three weeks of trial, and throughout it all, the jury was attentive, considerate and careful."

The verdict allotted damages for monetary losses, reputational harm and emotional distress, humiliation and loss of ability to enjoy life. Bryan Advisory could appeal the decision, and Caputo said that his clients' former RIA has filed for post-trial relief "essentially asking for a new trial," which is a necessary step before challenging a verdict in a higher court.

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For Besnoff, the case serves as one example out of others "with very similar circumstances" at firms ranging in size for small RIAs to the biggest brokerages in the industry, he said. The U5 filings constitute "very serious allegations" that can lead to subsequent investigations by FINRA or other regulators and difficulty finding their next job "because employers generally will not hire a financial advisor with these serious negative disclosures" on their record, Besnoff said.

"If it's accurate and negative, well, the firm was required to file it that way, and there are consequences to financial advisors that actually engage in negative conduct," he said. "It's important for financial advisors to follow all of the rules and regulations and for firms to be certain that they're filing the U5 forms accurately and completely as required."