(Bloomberg) -- The man who led the revival of old-school Wall Street name EF Hutton as a leading SPAC investment bank is embroiled in a federal securities fraud probe, according to people familiar with the matter.
Joseph Rallo was served a search warrant by federal agents in May as part of a securities and wire fraud investigation led by the US attorney’s office in Brooklyn, New York, the people said. The probe was also cited by EF Hutton itself in a lawsuit the firm filed Wednesday accusing Rallo of stealing millions as chief executive officer by falsifying his expense reports.
It’s unclear if the federal probe is related to EF Hutton’s allegations. Representatives for Rallo had no comment on prosecutors’ investigation or the EF Hutton lawsuit against him. The US attorney’s office declined to comment, as did EF Hutton.
In its suit, EF Hutton said that, despite being paid tens of millions of dollars, Rallo falsified his expenses to get the firm to pay for private jet travel, Knicks play-off tickets, his kid’s private school tuition and intravenous treatments for hangover recovery, among other things. The firm is seeking at least $3 million in damages as well as a declaratory judgment that Rallo was properly terminated as CEO.
‘People Listen’
It’s all a far cry from the buttoned-down firm that was once one of the largest US retail brokerages and famously proclaimed in 1970s and 80s commercials: “When EF Hutton talks, people listen.”
That EF Hutton merged with Shearson Lehman/American Express Inc. in 1988. According to the suit, the EF Hutton trademark was acquired in 2021 and adopted as a rebrand of Kingswood Capital Markets, the investment banking arm of Benchmark Investments LLC. Rallo, who joined Benchmark in 2020 from Aegis Capital Corp., became EF Hutton’s CEO and holds a large stake in the firm.
In 2021 and 2022, EF Hutton became a top underwriter of special purpose acquisition company listings, including for the SPAC that later acquired Trump Media & Technology Group. According to the suit, EF Hutton had banking and underwriting revenue of almost $150 million in 2021.
EF Hutton claims Rallo received more than $44 million of compensation in 2021 and 2022 but says he likely squandered much of it on poor investments, several luxury cars, a $5 million East Hampton house and a $25 million Upper East Side apartment. The firm also says it believes Rallo incurred large gambling losses making six- and seven-figure wagers, claiming that he often boasted of his betting to other employees.
The lawsuit notes that the changing fortunes of the market impacted Rallo. In 2022, EF Hutton’s banking and underwriting revenue was down to $88 million. The following year, it fell to $58 million. The firm said that Rallo had also been paid around $4 million so far in 2024, even while EF Hutton was operating at a loss.
Extravagant Lifestyle
According to the suit, Rallo’s unwillingness to curb his extravagant lifestyle led him to seek reimbursement from the firm for a wide variety of personal expenses. These included meals, both a donation and tuition at Manhattan’s St. David’s School, wine purchases, hotel stays and private jet travel.
On the morning of May 6, agents from the Department of Homeland Security and the US Postal Inspection Service arrived at Rallo’s home and served him with a warrant, according to the suit. EF Hutton said it subsequently learned Rallo was a subject of a federal probe and determined that he couldn’t continue in his role as CEO while it was ongoing.
Both federal agencies declined to comment.
In a May 21 call with EF Hutton’s general counsel, Rallo allegedly threatened to “burn” down the firm. After weeks of talks, he agreed to be placed on voluntary administrative leave pending the investigation and an internal probe, according to the suit.
It was after Rallo went on leave that the firm says it discovered his allegedly falsified expense claims. According to the suit, Rallo’s lawyer has refused several requests to meet with the law firm conducting EF Hutton’s internal probe.
The case is EF Hutton Partners LLC v. Rallo, 654880/2024, New York State Supreme Court (Manhattan).
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