Funds News

CORRECTED - UPDATE 2-HighTower backs adviser tripped by Ponzi, adds 2 execs

* CEO supports Curtis Lyman, named in Ponzi-related suit

* Says Lyman was a victim, did appropriate due diligence

* LaMena joins as chief operations officer in New York

* HighTower adds $300 mln adviser Levin in San Francisco

* CEO says half of Strata Group clients joined HighTower (Fixes fraud figure in 5th pargraph to millions)

By Joseph A. Giannone

NEW YORK, March 31 (Reuters) - HighTower Advisors, a firm acquiring high net worth financial advisers across the United States, on Wednesday said it lured two more Morgan Stanley wealth management executives, but found itself on the defensive over an adviser it hired last year.

The CEO of the Chicago firm, which touts a client-friendly model, gave his “unreserved” support to Curtis Lyman, a former Lehman Brothers adviser hired last May who earlier this month was sued for investing client money in what turned out to be a feeder fund for a $1.4 billion Ponzi scheme.

Lyman, an adviser in Palm Beach, Florida, purchased for his clients promissory notes issued by an entity known as Banyon 1030-32 LLC, which in turn fed cash to Florida lawyer Scott Rothstein.

Rothstein, in jail awaiting his May 6 sentencing, faces up to 100 years in prison for running a scam that sold nonexistent legal settlements. Money from new investors was used to pay off earlier investors.

Two lawsuits filed this month in Palm Beach County Circuit Court accuse Lyman of being negligent for not spotting the scam. The plaintiffs, who collectively lost more than $4.6 million, further say Lyman should have uncovered the criminal background of the Fort Lauderdale businessman who ran Banyon.

The lawsuit threatens to dent the reputation of a company that has grown quickly, touting a client-friendly twist on the wealth management business.

HighTower contends Lyman lost “a significant amount” of his own personal money to the scheme, showing he did not intend to harm his clients.

“We are aggressively pursuing all available remedies because Curt Lyman is as much a victim as the other Ponzi scheme victims,” HighTower CEO Elliot Weissbluth said in an interview. “We are defending any allegations of HighTower wrongdoing.”

HighTower also contends Lyman conducted “appropriate” due diligence before making the investments.

“It was a suitable investment. We were frankly as surprised as anybody when it turned out Rothstein was a Ponzi artist,” Weissbluth said. Lyman “has my unreserved personal support and unreserved professional support.”

Since its October 2006 launch, HighTower has added roughly a dozen high net worth advisory teams and $16 billion in client assets. Still, the Lyman matter shows recruiting advisers also brings risk.

Earlier Wednesday, HighTower said it had added two more senior wealth managers from Morgan Stanley MS.N.

HighTower hired Morgan Stanley private wealth management executive Michael LaMena as its chief operations officer. LaMena spent 14 years at Morgan Stanley, most recently running private wealth management operations in New York.

The firm also hired veteran Smith Barney adviser Barnaby Levin to bolster its San Francisco office. Levin managed some $300 million in client assets.

Morgan Stanley and Citigroup C.N last year merged their brokerage businesses to create a joint venture, Morgan Stanley Smith Barney. Since then many hundreds of advisers, mainly from Citi's Smith Barney, have jumped to new firms.

HighTower last month nabbed a team led by five veteran Smith Barney advisers in Purchase, New York, known as the Strata Group. The team managed about $500 million in assets.

Morgan Stanley quickly filed a New York state lawsuit to block the move of the veteran Smith Barney brokers, accusing them of violating their contractual commitments and fiduciary duties.

Weissbluth told Reuters half of Strata’s clients already have moved to HighTower. “You can’t unring a bell,” he said. (Reporting by Joseph A. Giannone; Editing by Tim Dobbyn; Editing by Gary Hill)