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Antitrust suit against Schwab and TD Ameritrade merger draws 'stunt' accusations and judge agrees

Franklin Tsung’s company, BlackCrown, filed suit in New York against Schwab and TD, but his decision to do so without a lawyer made it a clear 'stunt,' sources say.

Friday, January 3, 2020 – 5:26 PM by Oisin Breen
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Gregory H. Woods: The Court dismisses this action sua sponte [without prompting] without prejudice because Plaintiff BlackCrown Inc. is not represented by counsel.

Brooke's Note: Yes, this suit gets called a stunt. But the reason the BlackCrown suit is interesting -- despite surviving a mere few days on Earth before a judge extinguished it -- is its poignant symbolism. In completing its super-merger with TD Ameritrade, Schwab is surely putting a superhighway through an RIA virginal forest -- namely the VEO software ecosystem. Thus far, we have barely heard a whimper. But it seems we should register concern. So as poor a legal maneuver as this Tsung suit proved to be, it lacked nothing in heart or RIA spirit and makes you ask: Where is everybody else?

With much to lose--and gain--for his father's RIA software firm, Franklin Tsung's BlackCrown Inc., filed a lawsuit to kill the  merger between Charles Schwab & Co. and TD Ameritrade Holding Corp. But the decision to press ahead without a lawyer sunk the case.

Bill Singer
Bill Singer: Such a non-lawyer strategy seems, at best, dubious.

While the lawsuit's intent-- if not merits--reflected many RIAs' fears, BlackCrown had an ulterior motive--it was also jockeying to take over TD's custody arm, TD Ameritrade Institutional, to allegedly “dissipate the anti-competitive effects” of the deal, Bloomberg reported. 

The BlackCrown CEO and founder's decision to sue Schwab may also have been made with an eye toward how his father's firm might fare should Schwab's less-third-party-friendly RIA technology usurp TD's widely praised open API software marketplace, VEO.

Tsung largely masterminded a deal with TD in Oct. 2011, that turned his father's 2009-founded RIA CRM software firm, AppCrown, into the conduit between TD-custodied RIAs and Salesforce software. See: How AppCrown got a big RIA footprint overnight.

Schwab has yet to confirm whether it will maintain VEO, which gives RIAs far greater access to third-party software. 

Indeed, there has been some speculation that it will kick it to "the curb" in favor of its own more proprietary service, OpenView Gateway, should the $26 billion merger go through. See: Schwab's reported TD Ameritrade deal leaves 10,000 RIAs in twilight zone.

Public relations ploy?

New York City-based BlackCrown filed its suit pro se (in one's own behalf) on Dec. 18  in the U.S. District Court for the Southern District of New York. 

Ari Sonneberg
Ari Sonneberg: The Judge was justifiably ticked off.

The complaint charges the San Francisco broker-dealer and RIA custodian pushed through an illegal, "anti-competitive" merger that will "disenfranchise" a swathe of RIAs by establishing a tiered "caste system." See: Schwab sends most RIAs to 1-800 custody service -- a downgrade many TD Ameritrade RIAs will have to swallow.

If the case had succeeded, Schwab potentially would also have found itself liable for a hefty $1 billion payout to TD, according to Form 8K filings by TD on Nov. 27. See: Breaking up is hard to do: Schwab and TD Ameritrade both on hook for $1 billion should either firm get cold feet, shareholders revolt, or antitrust regulators quash deal.

Nevertheless, BlackCrown's attempt at deal-killing was DOA, after it went to court in its legal birthday suit, says Bill Singer, attorney and writer of the Broke and Broker blog, via email.

Order of Dismissal
BlackCrown vs Schwab -- Order of Dismissal (click to enlarge).

"When I first heard about this case, I rolled my eyes ... [and in the] Order of Dismissal ... the court barely disguises its annoyance with the perceived silliness of the filing."

"The federal court would have none of this nonsense ... given the serious antitrust issues alleged and the likely full-tilt defense from Schwab. Such a non-lawyer strategy seems, at best, dubious and, at worst, a public relations ploy," he adds.

Neither Franklin Tsung, nor his father, Ted Tsung have replied to a request for comment at the time of publication.

Call it a stunt and legally dubious, but the suit caught the RIA world's eye for good reason, says Nerd's Eye View Blogger, Michael Kitces in a tweet.

"Though filed pro se or not, the concerns being raised really ARE shared by the RIA community -- [namely a] lack of competition, especially for large RIAs, if [or] when #Schwabitrade controls [the] majority of the market. Not to mention [the] risk of #FinTech innovation loss if TDA VEO goes away," Kitces tweets.

Who needs tradition?

BlackCrown filed its complaint in the Southern District Court of New York on Dec. 18, but it was only docketed by the courts on Dec. 30, according to court records.

Franklin Tsung
Franklin Tsung masterminded AppCrown's deal with TD Ameritrade in 2011.

Just three days later (Jan. 2), U.S. District Court Judge Gregory H. Woods, a 2013 Obama-appointee, dismissed the case "sua sponte" (without external prompting), and criticized BlackCrown for its failure to observe precedent.

"'It has been the law for the better part of two centuries ... that a layperson may not represent a corporation" ... in other words, BlackCrown must retain an attorney. Should it wish to prosecute ... pro se, it must be dismissed," wrote Woods, citing Rowland v. California Men's Colony (91-1188), 506 U.S. 194 (1993).

But Woods dismissed the suit without prejudice, leaving open the door to refile the suit with proper representation.

Face meet palm, says Ari Sonneberg, an attorney and chief marketing officer at the Boston-based Wagner Law Group, via email. 

"The Judge was justifiably ticked off ... [and] BlackCrown may have [also] damaged some of its own credibility," he explains.

"[This means] they may not get some of the latitude that judges often afford the 'little guy' when going up against the legal team of a corporate giant like Schwab, if they do refile and return with a lawyer."

Smelled wrong

Indeed, BlackCrown's suit was ostensibly a serious filing. It alleged, among other things, that the Schwab-TD union would gut RIA custody of the kind of competition that the market needs. But many observers criticized the firm's apparent ignorance of its legal obligation to hire a lawyer.

Eric Clarke
Eric Clarke: I don’t normally discount things, but this seems like a public relations stunt.

It smelled wrong from the beginning, says Eric Clarke, CEO of Omaha, Neb.-based portfolio management vendor and TAMP, Orion Advisor Solutions, via email.

"I don’t normally discount things, but this seems like a public relations stunt by Franklin Tsung and I feel this claim has little to no merit."

Quite right, says Sonneberg. 

"[It's] hard to believe BlackCrown wasn't aware they're required to have legal representation in bringing a lawsuit, so, even though many believe there's a legitimate antitrust claim to be made ... the theory this was a PR stunt isn't far-fetched."

"Certainly BlackCrown has gotten a lot of press from it," he adds.

Beyond spin, it's also possible that BlackCrown avoided appointing a representative because it didn’t want to bear the financial brunt of what would likely be a lengthy legal process, says Singer.

"[The Plaintiff] may not have been willing to incur the costs of retaining a lawyer – which casts some doubt as to the likely merits of [its] effort."

BlackCrown is a small private equity firm structured as an RIA with a particular focus on financial services-linked firms with an EBITDA of between $10 million and $50 million.

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See more related moves

Mentioned in this article:

TD Ameritrade
Asset Custodian
Top Executive: Tom Nally

AppCrown, LLC
Outsourcer, CRM Software, Tech: Other
Top Executive: Ted Tsung

Peter Giza

Peter Giza

January 3, 2020 — 8:26 PM
Oisin, Respectfully from my vantage point the intent was completely PR value. In line with Ari's statements I can only imagine how irritated the judge must have been. I suspect the damage done will go far beyond any future success or lack there of in the courts if they decide to pursue action against the CS/TD merger. Unfortunately sometimes little thought is given to the affect on reputation when taking legal action especially if it is construed as frivolous or dubious in its intent. Not a great way to start a new year and new decade with negative PR that boomeranged. Pete

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