In a cautionary tale for financial advisors, the sale of a significant advisory practice for $3.6 million nearly three years ago has entered a new round of costly litigation.
Devin Garofalo of Colonial River Wealth Management and Jayne Di Vincenzo of Fiduciary Edge Advisors have accused each other of violating the terms of an asset purchase agreement for Di Vincenzo to sell her practice of more than 330 households and $170 million in client assets to Garofalo's firm, according to court and arbitration filings. Colonial River filed a civil lawsuit against Di Vincenzo and her former brokerage, Cambridge Investment Research, in the federal court of Richmond, Virginia, earlier this month alleging breach of contract and other claims. However, Di Vincenzo won a FINRA arbitration
Garofalo is seeking to vacate that decision while pursuing the civil case and a separate FINRA arbitration case against Cambridge, but the arbitration panel held him liable for compensatory damages, interest, attorney fees and other costs. For advisors eyeing the sale or purchase of a practice amid the industry's
Parties can often avoid such lengthy legal disputes by compiling "a clearly written, comprehensive set of documents" that are "essential to a successful transaction," FP Transitions General Counsel Rod Boutin said in an email. As the head of the M&A and succession planning consulting firm's legal department, Boutin advises the parties to a potential deal that "price and payment terms are the easy part."
"More important is protecting the seller's clients by having a consistent investment philosophy between seller and buyer and having an agreed transition plan that is SEC- and FINRA-compliant," Boutin said. "The parties should appropriately allocate deal risk and state their post-closing responsibilities and restrictive covenants."
Other steps advisors can take include spending as much time as possible with the other party prior to signing the deal, establishing milestones with a clear understanding of what will happen if those don't come to fruition and finding alternatives that make a seller less beholden to just one prospective buyer, said Andres Lares, the managing partner of a training company called the Shapiro Negotiations Institute.
"Litigation or any type of disagreement that requires lawyers, even if it ends up in court, is a suboptimal outcome for the two parties," Lares said in an email. "Sadly, there are more than a few cases where financial advisors are buying or selling a practice and that's where it ends up."
Garofalo's attorney, Tom Wolf of Miles & Stockbridge, said in an email that Di Vincenzo and an arbitrator in the FINRA proceeding had a "previous cozy business relationship" that they were obligated to disclose before the hearings under the regulator's rules. Di Vincenzo told Garofalo, FINRA and their brokerage firm that she had retired in the summer of 2020, Wolf said.
"Yet, within two weeks, she was reengaging with her old clients," he said. "One should not be able sell her business for a lot of money by promising not to take back any of that business, promising not to compete and not to hire away the buyer's employees, and then do what [Di Vincenzo] did and essentially take back for free a big chunk of the assets she sold and get a third party broker-dealer to help her do it by hiring away one of the buyer's employees."
Di Vincenzo directed Financial Planning's inquiries about the new lawsuit to a dozen other filings that have come in the wake of the February 2020 agreement. Cambridge denied Garofalo's allegations.
"Cambridge does not comment on pending litigation matters," spokesman Jeff Wulf said in a statement. "We believe the allegations as directed against Cambridge are without merit, and we intend to vigorously defend ourselves."
The negotiations between Garofalo and Di Vincenzo began in 2019, when she decided "to achieve a healthier work-life balance" after 20 years in the industry by folding into another firm that could take administrative and operational tasks off her plate while ensuring "the same services with the same commitment to professionalism and excellence as she had practiced throughout her career," according to her September 2020 arbitration complaint. An M&A consulting team from her then-brokerage, LPL Financial, gave her a list of prospective buyers that included Garofalo's name. She chose him after interviewing several candidates.
"The continuity of Ms. Di Vincenzo's involvement was deemed critical to the financial success of the merger, client retention, and the final cost of the merger to the purchasers and final payment to Ms. Di Vincenzo," according to her arbitration claim, which noted that at least 90% of the clients followed her to the merged entity created through the February 2020 merger.
Despite the filming of a joint video message to clients and a
Di Vincenzo "failed to undertake the contractually required efforts to help transition her former clients to Colonial River" and left the firm and LPL by that summer, according to the lawsuit filed by Garafalo's firm. She then launched Fiduciary Edge under affiliation with Cambridge, eventually drawing several of the former clients from the previous practice, Lions Bridge Financial Advisors, adding up to more than $79 million in client assets, the lawsuit said.
Di Vincenzo "has effectively tried to retain and reconstitute the very business she had sold," according to the filing. "Defendant Cambridge was aware that Di Vincenzo's actions violated her obligations under the restrictive covenants. Nevertheless, it agreed to aid her scheme by providing critical broker-dealer services. And it conspired with Di Vincenzo to hire an employee of the business, and then of Colonial River, who facilitated the scheme. This enabled Di Vincenzo to steal the accounts she previously had sold to [the] purchasers."
She calculated the assets that transferred to her new practice at less than half the amount alleged by Colonial River and said that many clients simply "expressed dissatisfaction with Garofalo's services, lack of responsiveness, and unprofessionalism," according to the arbitration complaint. In the case, she accused Garofalo of breaches of contract and the covenant of good faith and fair dealing, disparagement and defamation, fraud and misrepresentation and tortious interference. Garofalo denied those allegations and filed a counterclaim accusing Di Vincenzo of many of the same violations of FINRA rules and laws. A Norfolk, Virginai-based panel ruled in her favor earlier this year.
"The arbitration hearing was highly contentious and continued over a week consisting of over 14 hearing sessions" in December 2021, with the panel's award "granting virtually every single aspect of relief requested by Di Vincenzo and denying in its entirety the counterclaim of Garofalo,"
Garofalo is asking for the Richmond City Circuit Court to take
In other filings in the arbitration complaint, Di Vincenzo has accused Garofalo of going on "an unrelenting campaign" that forced her to leave Cambridge for Kestra Investment Services last year and included threats of lawsuits against the clients in addition to the "frivolous, vindictive complaints" against her. Adding to the legal burdens faced by Garofalo in seeking to overturn the decision and pursue the federal case, U.S. District Judge Roderick Young ordered Colonial River on Nov. 16 to file an amended complaint with "the specific information required for the court" to determine whether it has jurisdiction to hear the lawsuit.
Young gave Colonial River 30 days to comply with the order. The next hearing in the Richmond City Circuit Court is scheduled for Feb. 23 — three years to the month after the deal.
This story has been updated to include comments from an attorney for one of the parties who responded to requests for comment after publication of the original version of the article.
