The Mutual Fund Store sues its own mega-franchisee to force sale of three stores

Brooke’s Note: The Mutual Fund Store is one of a tiny handful of RIAs making a bid for a national footprint. It is doing so with smart ownership — Warburg Pincus, top-line execs — namely former TD Ameritrade branch chief John Bunch and the requisite crazed charismatic leader in its founder and chairman, Adam Bold. Considering the scope of the management challenge, we have heard hardly a peep of acrimony in all these years. Here’s a peep, though honestly neither Bold nor Roper sounded agitated, suggesting they can work this thing out.

The Mutual Fund Store has filed a lawsuit against a lawyer who has controlling interest in its franchise stores in Fresno, Calif.; Wichita, Kan.; and Seattle. See: Alleging gambling habits, SEC concerns and steady AUM declines, The Mutual Fund Store is offering $5.5 million to Jeff Roper to sell and walk away.

The Overland Park, Kan.-based national RIA, with 130 locations and about $8.4 billion of AUM (it comprises multiple ADVs), filed three lawsuits against The Mutual Fund Store franchisee, Jeffrey Roper. See: Why and how a lawyer in St. Louis is running RIA franchises in Fresno, Seattle.

RIABiz first became aware of the suit when it obtained an e-mailed letter sent out to franchisees and employees late Friday by The Mutual Fund Store’s chief executive, John Bunch. See: John Bunch is hired as the new CEO of The Mutual Fund Store.

“While we do not expect that the filing of these lawsuits will impact The Mutual Fund Store business or our relationship with our valued business partners, we wanted to make you aware,” Bunch wrote.

The news was confirmed by TMFS chairman and founder Adam Bold by phone.

Clients not affected

The lawsuit was filed in order to enforce a clause in the franchise agreements of the three stores, Bold says. The clause states that The Mutual Fund Store can buy back any store when it wants. Roper has declined a request to fulfill that requirement, Bold adds. RIABiz did not obtain the legal documents.

“It appeared there wasn’t going to be a meeting of the minds; it was easier to do this,” he says. See: The Mutual Fund Store makes big moves: storming Manhattan, going big on Tamarac and quadrupling its disc jockey force.

But The Mutual Fund Store may have jumped the gun in filing a lawsuit so early in the process, according to Roper. Roper’s comments were added more than 12 hours after original publication of this article.

He says the company filed the suit on Dec. 31, which was the same day he received the asset purchase agreement, and that he is still doing his due diligence on its contents. “It’s hundreds of pages for millions of dollars,” he says.

Bold stressed that the lawsuit is strictly a business issue between franchisee and franchisor and that he and his company do not have concerns about the proper care of clients by Roper’s franchises.

Adam Bold: I can anticipate at
some point in the future we
want to go public and we
need everything under one roof and
we have one guy in Poughkeepsie
holding things up.

Roper agrees with this characterization of the situation and says that the dispute does not even involve the financial terms of the deal. He says he is just trying to be sure the sale agreement is in accordance with the franchise agreement and California law. One sticky issue with departure agreements under California law is that the state doesn’t recognize non-compete covenants — often a key component of a franchise.

“Non-competes are not valid in California but that doesn’t mean an employee can do whatever they want [upon departure],” Roper says.

No beef over buyout terms

Still, Bunch’s e-mail references client interests.

“The Mutual Fund Store has an obligation to protect the interests of our clients and the reputation of the Company, employees and our franchisees,” he writes. “To that end, yesterday we filed three lawsuits against The Mutual Fund Store franchisee, Jeffrey Roper. This legal action seeks to protect these interests…” See: Why you may not be adequately covered against lawsuits.

Were client interests at stake, TMFS would have shut the Roper franchises down — something it has the right to do under the franchise agreement, Bold says. There is also, he confirms, not a dispute over the terms of the buyout, which is a multiple of revenues, he adds.

'One guy in Poughkeepsie…’

Bold says the reason that Bunch sent out a letter to the whole company was to let everyone know that this is a one-off situation and to assuage potential concerns that TMFS was planning to buy up all the franchisees. In fact, this is the first time in the 16-year history of the company that it has had to file suit to enforce the franchise contract, he says. See: Branch openings at The Mutual Fund Store ground to a virtual halt.

Roper has owned the Fresno store, which manages $80 million of AUM, since 2008; the Seattle store since June 2009; and the Wichita store since March 2010, according to BrightScope Inc.

Bold says that his company’s buyback clause contemplates a time when it might be needed to complete a successful initial public offering — and contractual leverage is necessary to make sure it happens.

“I can anticipate at some point in the future we want to go public and we need everything under one roof and we have one guy in Poughkeepsie holding things up.”

Of the $8.4 billion of AUM, TMFS has $5.2 billion and franchisees have $3.2 billion.

'Entrepreneur’s spirit’

Warburg Pincus, a private-equity company in New York that holds a majority interest in TMFS, often contemplates IPOs as an exit strategy. See: Mutual Fund Store sells controlling interest to Warburg Pincus.

Roper is a lawyer and tax consultant. In December 2007, he became a passive investor in a new Mutual Fund Store in the Harrisburg, Pa. market.

“I was constantly looking for opportunities,” he said in a 2010 interview with RIABiz. “I have an entrepreneur’s spirit. Though I would have been open to a lot of industries, I honestly believe the Mutual Fund Store offers a superior product.”

Roper is able to run his franchises from his home base in St. Louis, and still work as a lawyer on the side, he added at that time. Now he says he will continue to seek business opportunities more than legal ones. He has an MBA in addition to a legal degree.

Roper paid $75,000 for the Fresno franchise.

“I feel like I was a very successful franchisee,” Roper says. “I started at zero.”