Baird exec fails to disclose rental companies
Mayor upset that owner of LLCs works for firm that manages millions for city
James H. Herrick, the Robert W. Baird & Co. Inc. executive who moonlights as an owner of companies that rent out problem-plagued central city properties to low-income tenants, failed to disclose his ownership in the companies, securities filings show.
Stock brokers are required to detail other business activities they are involved in so a firm — and a firm’s clients — can assess and avoid potential conflicts.
Waving a printout of Herrick’s report posted by the Financial Industry Regulatory Authority’s (FINRA) BrokerCheck site, Milwaukee Mayor Tom Barrett said he was bothered by the lack of disclosure by Herrick, a managing director of global trading for Baird’s Institutional Equity Services group.
“The City of Milwaukee is a client of Baird,” Barrett said during an interview last week in his City Hall office. “You would think that a client would be interested in knowing that there was a principal who was not disclosing activities that hurt the city.”
Barrett said city officials were aware of the filing, but he declined to say whether he intended to talk to officials at Baird, a company founded in 1919 in Milwaukee that has more than 100 offices on three continents.
An attorney for Herrick said his client was a passive investor in the companies, and that does not require disclosure. Some of the limited liability companies’ current and former employees detailed more hands-on involvement on Herrick’s part, however.
The Milwaukee Journal Sentinel this month disclosed that Herrick, who lives in a $1.1 million home on a 5-acre River Hills estate, was tied to at least a half dozen limited liability companies, some of which own rental properties that have been repeatedly cited for violating city building codes and were delinquent on property taxes.
In an email statement to the Journal Sentinel last week, Baird made clear it was not happy to learn about the side business owned by Herrick, 52.
“We’re obviously disappointed and have taken this very seriously. Our senior-most leaders have been personally involved as we have dug into this to better understand the associate’s outside real estate activities and what went wrong in these instances,” according to the statement issued by John Rumpf, a Baird spokesman.
“What we have learned is that while the associate’s intentions have been to invest in and enhance the properties he has been associated with, it is clear that there have been lapses in both judgment and action in the situations noted in the story. The associate deeply regrets that and has taken a number of steps to address any remaining problems.”
The City of Milwaukee holds two accounts with Baird worth a combined $38 million, according to Mark Nicolini, the city’s budget director.
One account is tied to a voluntary supplemental retirement program, and the other is a reserve account for pensions.
Baird has charged the city about $434,000 in fees since 2011 to manage the latter account.
It is unknown whether the failure to list the LLCs violated FINRA rules, and if so what sanction if any would be imposed. FINRA is the regulatory agency overseeing the nation’s securities firms.
Herrick’s attorney, Sean Sweeney, said in an email his client was not required to disclose his interest in the LLCs.
Brokers are required to list any business they are engaged in as a “proprietor, partner, officer, director, employee, trustee, agent or otherwise,” according to BrokerCheck.
“Mr. Herrick is an investor in these entities for which other people ... manage the properties,” Sweeney wrote. The FINRA rule “specifically excludes passive investments, such as rental income real estate, from the reporting requirements for outside business activities. Mr. Herrick is in compliance with his FINRA reporting requirements.”
Sweeney has declined to say whether Herrick has any partners in the LLCs.
FINRA guidelines for enforcing the requirement mandating that all outside businesses be disclosed by securities dealers state that the penalty can be more severe if “the outside activity resulted directly or indirectly in injury to customers of the firm.”
The guidelines state the penalty for violating the disclosure rule can range from a fine of $2,500 to $73,000. Securities dealers could also be suspended or, “in egregious cases,” lose their licenses.
When a reporter and photographer toured some of the properties owned by Herrick LLCs, tenants voiced complaints about rats, bed bugs, inadequate heat and lack of ample windows and properly operating doors.
One woman pointed to a filthy sink that could not drain because the pipes were not connected to the plumbing system.
The story was part of an ongoing investigation into how some inner-city landlords game the system by failing to pay property taxes and Municipal Court fines for building code violations.
Some landlords own properties through LLCs to keep their identities secret and protect their personal assets from liabilities incurred by the companies.
Among the properties owned by one of the LLCs was a 50-unit apartment building on the 1300 block of W. Locust St. that was boarded up by the city for two months in 2011 because building inspectors determined it was “unfit for human habitation.”
That property was owned by JHH Enterprises LLC until September when it sold at a sheriff’s sale after it was foreclosed on and placed into receivership. JHH, Lisbon-North LLC and Pyramid Investments LLC are among the LLCs that Herrick owns or is linked to that were not disclosed on the regulatory filings.
Collectively, LLCs connected to Herrick owed $156,353 in delinquent property taxes until November, when they were paid.
The payments came after a reporter hand-delivered a letter to Herrick’s home requesting an interview and stating the Journal Sentinel was working on a story about the LLCs.
Those companies still owe $3,160 in municipal court judgments for building code violations.
JHH also owns an apartment building on the 2300 block of N. 51st St. that has been cited by Department of Neighborhood Services building inspectors for at least 48 building code violations this year.
Inspectors have cited the property for infestations of roaches, bed bugs, inadequate hallway lighting and for failing to maintain a temperature of at least 67 degrees.
Herrick did list two LLCs that invest in real estate on the filings used by FINRA to prepare the BrokerCheck report. In those cases, the filing stated, he spent one to two hours a week on the businesses.
However, the spellings of the names of the businesses on the securities filings do not match state financial records for the companies.
The LLC Herrick listed as “4475 N. Hopkins LLC” is registered with the Wisconsin Department of Financial Institutions as “4470-4475 North Hopkins LLC,” and the one listed as “Distressed Equity LLC” is registered as “Distressed Opportunity, LLC.”
Five former and current employees of the LLCs told the Journal Sentinel that they received instructions on how to maintain the buildings directly from Herrick.
Some said they even met with Herrick on occasion at his River Hills home.
For example, Mario Dickens, a Milwaukee printer who rents office space from one of Herrick’s LLCs, said he decided to rent the storefront property after meeting with Herrick.
In addition, Dickens said, Herrick hired him to collect rent and do other work on buildings owned by two Herrick LLCs.
“I do everything he needs done,” Dickens said. “Whatever Jim needs for the buildings.”
Bill Singer, a New York securities lawyer and former regulator, said the description of Herrick’s role “does not sound to me as a passive role ... if he is engaged in any conduct that results in running some aspect of the business, that’s not passive.”
But, Singer cautioned, it will be up to Baird and FINRA to determine whether the LLCs should be disclosed.
The Baird email said, “We’ve reviewed (Herrick’s) outside activities and his U4 and, if appropriate, will make any updates.”
The U4 is a filing that serves as the basis for much of the information posted in BrokerCheck.
Singer, a frequent critic of securities regulators, said the disclosure rule is on the books not to prevent brokers from engaging in other businesses. “The rule is here so firms don’t get sandbagged” by a broker running a business that might impact the brokerage in a negative or positive way.
“A firm is entitled to know whether a managing director is running a brothel, a strip club or a shelter for battered women,” Singer said.