Jud Bergman admits Envestnet will be set back months, if not quarters at hands of Marc Kasowitz and his client, causing firm's shares to plummet
With FinancialApps yanking its software from its Chicago-based ex-partner -- and suing it on the way out the door -- the Envestnet CEO needs to find replacement and ward off a legal attack
Brooke's Note: There was a time when you might have called Envestnet a small niche provider -- of wrap accounts to IBD reps at small broker-dealers. Now it's trying to be a big provider to a multitude of niches and doing a fairly good job of it. But Envestnet is not perfect, and it has a bigger target on its back for competitors and lawsuits. Those circumstances can lead to the kind of uncomfortable phone call that Jud Bergman just had with a pack of Wall Street analysts.
Jud Bergman finally broke his silence on the $100-million lawsuit filed against his firm -- and his reaction spooked investors.
The Envestnet CEO admitted that the suit filed last week on behalf of FinancialApps and its CEO Bob Sullivan has messy ramifications -- not least because the software is no longer available.
Marc Kasowitz, one of Donald Trump's personal attorneys, filed the suit and threw his weight behind it. See: Entrepreneurial firm hits Envestnet with $100-million lawsuit for alleged Yodlee 'Trojan Horse' scheme used to steal proprietary technology
"The vendor suspended service causing a disruption that affected several clients and prospects," Bergman told analysts during Wednesday's earnings call.
The stock closed at $64.82 Wednesday (Aug. 7) and slipped 11% to close Friday (Aug. 9) at $58.42. It's also off 25% from its 52-week high of $73.94, hit just two weeks ago.
Envestnet, with a $3.7 billion market cap, saw no reaction from Wall Street when the original lawsuit was filed. In fact, Envestnet's shares rose more than 1% to $72.26 on July 31, near an all-time high for the shares on a mostly down day for the market as a whole.
Bergman did not mince words about the strategic importance of the FinancialApps software to his firm's plans.
"The credit decisioning product was one of our faster growing offerings for analytics, and we had expected over time would kick up some of the growth as would the more traditional investment manager analytics that we are pursuing," he said on the call.
The FinancialApps lawsuit accuses Envestnet of bullying it into revealing intellectual secrets on the pretense of needing to see under the hood to better serve big clients.
The suit could have a significant impact on Envestnet because the Fort Lauderdale, Fla.-based company's software is vital to its mission of becoming an MRI for banks, according to Envestnet. It uses big data and algorithms to cut down on labor-intensive manual processing of paperwork.
Envestnet has 100,000-plus IBD reps and RIAs and 24 million of their clients have assets on its platform.
On one level, Bergman expressed confidence the lawsuit is irrelevant to his company's current course.
"We believe the vendor's allegations are false and without merit, and we will respond appropriately and defend ourselves vigorously," he said on Wednesday.
Kasowitz did not respond to email requests for comment about Bergman's reaction. But the famed lawyer was vociferous in an RIABiz interview last week.
“FinancialApps developed brilliant technology which disrupts the credit and lending market, allowing financial service companies to evaluate credit risk more effectively than ever before," Kasowitz said.
"Envestnet and Yodlee have deliberately stolen FinApps’ technology, which is entirely unwarranted and unlawful. We look forward to proving that Envestnet and Yodlee are liable for significant damages to our client, and persuading the court to issue a permanent injunction enjoining defendants from further unlawful activity.”
The lawsuit will cause Envestnet pain - even if FinApps can't make a case, said Joel Bruckenstein, founder of the popular T3 conference, says.
“Anytime you have a lawsuit, and it becomes public – whether it has merit or not – it’ll cause you problems," he says. "I’ve had that happen." See: Brian Hamburger joins the fray -- and ups the ante -- in Bruckenstein-Winterberg lawsuit
The bigger problem may be plugging the software hole left by FinancialApps absence, though Bergman assures that it is doable.
'Months or quarters'
"...I am highly confident that eventually we will find a new solution with a new provider that enables us to address this market opportunity. Whether that – whether that's months or quarters, I can't say right now, but the expectation is that it's closer to months.
The odds that Envestnet can replace FinancialApps are hard to handicap, Bruckenstein says.
“They’re not a company I’ve run into before, and it’s hard to tell if they’ve got something unique. I know they do analytics, but that’s very vague and can mean almost anything.”
Bergman makes the analysis more complex by saying that FinApps software was not up to snuff.
"We experienced shortcomings in the technology provided by a vendor we relied on to deliver certain credit-decisioning analytics to our banking customers."
Bruckenstein credits Bergman for making the best of a bad situation.
"A lawsuit is a pain in the ass," he says. "Jud is a straight shooter and instead of trying to paper it over, he said he’d rather not be dealing with it, and that’s totally fair.”
Envestnet -- "adjustment" caveats aside -- had good results to crow about amid its concern about a new lawsuit.
Compared to the second quarter of 2018, adjusted revenue grew 13% to $227.9 million and adjusted net revenues, which exclude asset-based cost of revenue, grew 16% to $167.6 million. Adjusted subscription-based recurring revenues increased 33% from the prior year period.
And Bergman believes Envestnet still has a big future in credit analytics.
"We continue to see credit-decisioning analytics as a big opportunity for Envestnet. Even though our revenue will be negatively impacted, at least through the remainder of this year, as we work to develop a new solution with a new provider."
Envestnet just named an ESG head to meld 'wellness,' 'The Intelligent Financial Life' and 'sustainable investing' into a single nirvana -- that starts outside of the product realm
Ron Ransom earned CEO Bill Crager's trust as chief business development officer and now will define how Envestnet conducts itself as a global citizen and vendor of wellness.
July 27, 2022 – 2:27 AM
Envestnet and Edmond Walters end odd couple 'Apprise' relationship with buyout, but leave open the door to jointly pursue RIA-to-entrepreneur dashboard... later
The MoneyGuidePro owner and eMoney founder execute clean break with Apprise IP rebranded as 'Wealth Studio.' Walters off to the races with a startup and vague promise to collaborate later.
April 6, 2021 – 12:50 AM
Envestnet turns to former FIS executive -- and replaces a CTO -- to help shape up the firm's disparate offerings into a unified whole around the concept of 'wellness'
The Chicago outsourcer gets Donna Peeples to harmonize products and marketing to move beyond the 'TAMP' label as Orion contends for market share with Brinker added.
November 10, 2020 – 2:45 AM
Behind the scenes, Envestnet's board of directors had much to tussle over before finally subtracting the 'interim' from Bill Crager's CEO title
With Jud Bergman gone at a chairman, a power struggle ensued to fill that spot, and the process dragged when taking the company private came under review