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.
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.
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.
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.
"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.
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."
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.
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.
Robinhood gets 'brilliant' upper manager -- and a spare CEO -- by nabbing TD Ameritrade's ex-thinkorswim top exec, hopefully to throw a lifesaver to Robinhood's sinking stock
The Menlo Park, Calif., firm nabbed Steve Quirk as first-ever chief brokerage officer to 'bridge the gap between academia and reality.'
January 6, 2022 – 10:33 PM
Oisín's snippets: Charles Schwab brand goes up on Omaha's TD Ameritrade stadium, home of college baseball world series • Interactive Brokers lands an RIA custody insider, Charlie Latimer, to climb the custodian ladder
The TDA brand lives on until the techies figure out how to make two systems into one, but change is in the air in Omaha, while Interactive Brokers gets a leg up in the custody business with a new hire.
December 27, 2021 – 9:58 PM
Goldman Sachs nabs TD Ameritrade's Darla Sipolt for RIA custody; Kate Healy, Jim Dario and Peter Dorsey are among 1,000 staffers cut by Schwab post TD merger
Included in the wholesale reduction of the Omaha, Neb.-based broker's redundant talent, about 40% of TD Ameritrade's marketing staff also got word today they have no future with their San Francisco-based owner
October 27, 2020 – 1:20 AM
Mark Tibergien sets up Ben Harrison to challenge Schwabitrade with a $150 million cut to Pershing's minimum and millions more to develop Veo-busting technology
The CEO suite hand-off in Jersey City pulls a trigger on a plan to bypass Fidelity's and eventually Schwab's custody units by luring disaffected RIAs.
March 11, 2020 – 7:58 AM
See more related moves