HomeBlogInvestmentSwamped by legal costs, broker-dealer files for bankruptcy protection

Swamped by legal costs, broker-dealer files for bankruptcy protection

After a quarter century of business, Kalos Capital Inc., a midsize independent broker-dealer based in suburban Atlanta that has been a proponent of alternative investments for retail clients, is closing down, crushed by more than $9 million in legal fees and costs related to sales of GPB private placements.

On Monday, the firm filed for Chapter 11 bankruptcy protection in U.S. Bankruptcy Court for the Northern District of Georgia.

According to Kalos Capital’s court filing in the bankruptcy, the deciding blow appears to have been legal costs and investor claims related to the firm’s sale of GPB Capital Holdings private placements. As part of the bankruptcy, the owners of Kalos, Daniel and Carol Wildermuth, are seeking to halt more than a dozen current arbitration complaints that investors have filed against the firm.

The firm’s business also was hurt by a slowdown attributed to the Covid-19 pandemic, according to a court filing.

Kalos this month also submitted its paperwork to the Financial Industry Regulatory Authority Inc. to close down or withdraw from the securities industry as a broker-dealer, according to its BrokerCheck profile.

Daniel Wildermuth declined to comment on Tuesday. According to industry sources, Kalos Capital had been up for sale but a deal for the entire firm failed to materialize.

The firm opened in 1997 and reached its peak in 2017 when, according to InvestmentNews data, the firm’s 117 producing registered reps generated $35.2 million in total revenues. Eighty percent of those revenues came from commissions, according to InvestmentNews, an unusually high amount for a brokerage industry that has been moving steadily to a revenue split of half — or more — from fees and the rest from commissions.

Broker-dealers and reps that sell alternative investments typically charge clients commissions, often on the high side of the scale allowed under industry rules.

Daniel Wildermuth has been a staunch advocate for alternative investments and espouses an endowment style of investing for retail clients. That means healthy allocations to real estate investments and other types of assets that typically have less liquidity.

That didn’t work out for Kalos Capital clients who bought private placements managed by GPB, which starting in 2013 invested in auto dealerships and trash hauling businesses.

In 2018, GPB failed to submit audited financial statements for two of its largest funds, a violation of industry rules, and then came under investigation by various regulators. GPB has since struggled, with its founder facing federal fraud charges.

In her notice of bankruptcy declaration, Carol Wildermuth pointed to “GPB litigation” as the driving force behind the bankruptcy of the firm, which had been profitable for years. Wealthy clients, those with a net worth of more than $1 million, were allowed to buy the product from the firm.

“Kalos cannot continue to fund the defense of the existing arbitrations, much less the costs of unknown future arbitrations notwithstanding its belief that any claims against it are not legally recognizable and are subject to meritorious defenses,” according to bankruptcy court filings. “Consequently, Kalos made the decision to file for protection under Chapter 11 of the United States Bankruptcy Code.”

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