WJB Capital Faced 25% Interest on Some Debts Ahead of Brokerage Shutdown

WJB Capital Group Inc. shut its brokerage operations after a year in which the Wall Street firm faced slower trading, a shortage of capital and interest rates of 25 percent on some debts.

The company, which told its 100 employees about the closing yesterday, had $8.17 million of subordinated debt, including $1.35 million due last month, according to a 2010 annual report with the U.S. Securities and Exchange Commission. New York-based WJB Capital also owed $3.5 million it borrowed from executives at interest rates of 10 percent to 15 percent, the filing shows.

The shutdown follows the collapse of MF Global Holdings Ltd., which filed for bankruptcy Oct. 31 after a $6.3 billion bet on the bonds of some of Europe’s most-indebted nations. Smaller broker-dealers may struggle amid a decrease in equity trading and face higher operating expenses tied to provisions of the Dodd-Frank Act, said James Angel, a finance professor at Georgetown University’s McDonough School of Business.

“There are all of those costs that are ratcheting up in a business that is ratcheting down,” Angel said in a telephone interview. “The regulatory environment in the Dodd-Frank world is making things even harder, especially for smaller firms.”

WJB Capital reported net income of about $221,000 in 2010 on revenue of $45.9 million, according to the annual report. Average daily equity-trading on major U.S. exchanges was about 7.8 billion shares in 2011, a 20 percent drop from 2009, according to data compiled by Bloomberg.

Conference Call

WJB Capital called its employees into a meeting in New York yesterday, with branch staff listening via a conference call, to notify them about the shutdown, said Mark Skolnick, general counsel for the company at law firm Platzer Swergold Karlin Levine Goldberg & Jaslow LLP. Closely held WJB Capital has non- brokerage operations and is exploring “other possibilities,” he said.

The company was “unable to raise capital in a manner that would have allowed the firm to continue its operations given the current climate and the constraints that would have been placed on everyone,” Chief Executive Officer Craig A. Rothfeld said in a telephone interview. The shutdown was voluntary, he said.

Rothfeld didn’t return subsequent telephone and e-mail messages left after regular business hours yesterday seeking comment on the company’s debts and whether any of it had been repaid in 2011.

Stockholder Loans

WJB Capital loaned $1.92 million to three unidentified stockholders at a rate of 4.5 percent in January 2006, according to the annual report filed with the SEC on June 17. In January 2009, the loan maturity dates were extended to January 2014, and the annual interest rate was reduced to 1.5 percent. About $1.85 million was outstanding as of Dec. 31, 2010, the report shows.

The firm also had loans outstanding to 14 employees totaling $4.81 million as of that date, with interest rates as low as 0.5 percent, according to the annual report.

WJB Capital simultaneously was borrowing a combined $3.5 million from two stockholders, Rothfeld and co-founder Michael N. Romano, at interest rates of 10 percent to 15 percent. The loans to Rothfeld and Romano are subordinated, according to the report, which adds, “to the extent that such borrowings are required for the company’s continued compliance with minimum net capital requirements, they may not be repaid.”

The company also owed $750,000 due Dec. 30, 2011 carrying a 25 percent interest rate. The lender’s identity wasn’t listed.

The accounting firm Marks Paneth & Shron LLP audited the 2010 financial statements, according to the annual report. A message left with an assistant for Mark Levenfus, the accounting firm’s New York-based managing partner, wasn’t returned.

‘High-Quality Talent’

WJB Capital announced new hires as recently as last month when the firm said it added four equity analysts, including Bryan Maher and John Newman from Citadel Securities LLC, according to a Dec. 8 statement.

“Fortunately and unfortunately, 2011 is providing growing entrepreneurial firms like ours the opportunity to add more high-quality talent,” Rothfeld said in the statement.

MF Global’s collapse has increased scrutiny of broker- dealers of all sizes, said Mark Williams, a lecturer at Boston University’s School of Management. He cited Jefferies Group Inc., the New York-based investment bank that slid 48 percent in 2011 and sought to reassure investors that it doesn’t face the risks that destroyed MF Global.

“If the market’s looking up the pyramid, questioning whether they can survive, then why wouldn’t the market also look down and look at smaller shops like WJB,” Williams said.

No Bankruptcy Plans

WJB Capital doesn’t hold client funds or assets, “so there’s no impact on customers,” said Michelle Ong, a spokeswoman for the Financial Industry Regulatory Authority. She declined to elaborate on reasons for the shutdown.

The firm has “no plans” to file for bankruptcy, said Skolnick, who declined to comment on whether the company plans to pay severance.

WJB Capital and Rothfeld were accused of fraud and breach of contract by an individual who said he made a $250,000 investment in the company, according to a complaint filed Dec. 31 in New York State Supreme Court in Manhattan.

The plaintiff, James McNally, said in his complaint that he was promised “compensation for the duration of the investment.” WJB Capital failed to pay and used the money “for fraudulent purposes,” according to the complaint. Rothfeld said in an interview that McNally provided an eight-year, $250,000 loan to the firm, not an equity investment, and received monthly interest.

“We deny the allegations,” Rothfeld said about McNally’s complaint. “They are baseless and without merit.”

WJB History

WJB Capital, founded in 1993 with two agency brokers on the floor of the New York Stock Exchange, had offices in five U.S. cities and ran live trading desks for all the nation’s major equities and options exchanges, according to its website.

The firm grew from 10 employees to more than 100 in the past decade. Public brokerage records on Finra’s website list nine owners and executive officers, including Rothfeld, Romano and co-founder William J. Bonfanti. Eric Ryan, a NYSE Euronext spokesman, declined to comment.

“Trading volumes are significantly down from the prior year, and the trend going into this year is also pointed downward,” said Richard Repetto, an analyst at Sandler O’Neill & Partners LP, the New York investment bank that specializes in financial firms. “For any broker, the current environment poses headwinds.”

To contact the reporters on this story: Laura Marcinek in New York at lmarcinek3@bloomberg.net; Bradley Keoun in New York at bkeoun@bloomberg.net

To contact the editors responsible for this story: Rick Green at rgreen18@bloomberg.net

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