Swarthmore Group founder is sued for millions by his ex-partners, the day after firm closes

Two senior officers of the newly closed Swarthmore Group Inc. have sued the investment firm and its founder, James E. Nevels, demanding a total of more than $22 million. The officers say they are owed because of the way the 31-year-old Philadelphia investment firm closed its doors on short notice Thursday, idling staff, shutting client accounts, and, they allege, ignoring a potential new owner.

Former senior portfolio managers Steven Schweitzer and William Scott Mero sued Nevels and Swarthmore in state court in New York. They allege Nevels hired them in early 2021 as “partners,” promised them $359,000 in yearly pay and bonuses, plus ownership status as Nevels’ expected successors, then left them stranded when he rejected plans to improve his troubled firm and closed it instead.

» READ MORE: Philly investment firm Swarthmore Group, managing $1.5 billion, is shutting down

The pair are demanding $1.2 million each for “breach of conduct” in the firm’s failure to pay promised salary, bonus, severance, benefits, and stock; at least $5 million each for “fraudulent misrepresentation,” accusing Nevels of recruiting them but failing to follow through on his promised succession plan and investments in building the firm; and another $5 million or more each for “breach of fiduciary duty,” or failure to act in the best interest of all Swarthmore owners, including themselves.

“For now, my client does not have any comment,” Douglas G. Leney, a bankruptcy attorney at Archer & Greiner who has been representing Swarthmore, said in an email reply to The Inquirer. He also said he had not seen the lawsuit. The civil suit was filed by lawyers Jonathan Marc Davidoff and Danielle Shayne Shapero.

Swarthmore, which at one time managed multimillions for Pennsylvania’s state pension system (SERS) and three suburban Philadelphia county pensions, lost that business but still invested a total of $1.5 billion in bonds and stocks for Philadelphia’s airports and other government and private clients, when it last reported assets to the Securities and Exchange Commission, as of March 31.

The firm advertised its status as a rare “minority-owned registered investment adviser.” A veteran investment professional who had a record of raising assets in an industry of firms mostly run by white leaders, Nevels, 68, who is African American, has been recruited to a string of important corporate and government boards.

A graduate of Bucknell University and University of Pennsylvania’s law and business schools, Nevels is a director of Pittsburgh-based Alcoa Corp., the largest U.S. aluminum company, and of Atlanta-based packaging giant WestRock, which makes corrugated cardboard containers in Lancaster and pill boxes in South Plainfield, N.J., among other locations. He is also chairman of the Business Council for International Understanding, a pro-trade business and policy group founded by the late U.S. President Dwight Eisenhower.

Nevels was appointed by former President George W. Bush as chairman of the federal Pension Benefit Guaranty Corp. and also formerly chaired Hershey Co., the Federal Reserve Bank of Philadelphia, and the former state school boards that controlled the Philadelphia and Chester-Upland school districts before the districts were returned to local control. Nevels is an adjunct professor of risk management at Texas A&M University.

But that “impressive resume” didn’t save the firm, according to the lawsuit. Instead, Nevels became so “distracted” with outside interests that he was “dangerously disconnected from the operations and management of Swarthmore.”

Schweitzer and Mero allege that the founder has “sought to mislead and disguise the truthful reasons for the closure of Swarthmore, which was Nevels’ gross negligence and egotistical management of the company.”

The ex-managers say in the suit that they each had more than 25 years of Wall Street experience before they were recruited by Philadelphia-based Diversified Search two years ago for “executive roles” at Swarthmore.

They said Nevels agreed to make the pair part-owners by giving them stock totaling around one-seventh of the company, which he told them was worth around half a million dollars, over the next two years, plus $359,000 a year each in salary and bonuses, plus health-care and tax compensation benefits.

Swarthmore announced in February 2021 that Schweitzer and Mero had become “partners” of the firm. Their addition “positions the company for long-term growth” and to “pass the baton” to its future leaders, according to Swarthmore’s press release.

The lawsuit says the pair found the company in “absolute disarray,” with client funds invested in securities that did not match investors’ guidelines and record keeping technology so poorly implemented that the firm at times could not make trades for clients. The newcomers recruited staff and urged better practices but allege that Nevels fought to prevent changes and “berated” their efforts.

The suit says Nevels failed to respond when staff told him an unnamed would-be acquirer was interested taking over the firm, after Nevels told employees on June 14 that he planned to shut down on June 30.

According to the suit, Nevels gave employees two explanations for why he closed Swarthmore. On June 14, he told staff he was shutting down ”solely because of the deterioration of his and his wife’s health, and that the two of them were to immediately move into an assisted living facility.” But in a June 27 memo to staff, he blamed “declines in the business, related to dramatic changes in the investment industry and economic conditions.”

In the end, the suit alleges, “Nevels unilaterally decided to close Swarthmore for his personal reasons” and “did not honor those promises” that he had made to his partners.