WealthManagement Magazine

Fool's Gold

Brokerage firms win the majority of cases in which they seek to collect money due on up-front bonus/promissory notes from brokers who have been fired or left the firm.According to a study by this magazine of NASDR arbitration cases from April '96 to June '97, firms won 87% of the 54 note cases, collecting a total of $3.2 million in damages--74% of the relief they requested. The average total award

Brokerage firms win the majority of cases in which they seek to collect money due on up-front bonus/promissory notes from brokers who have been fired or left the firm.

According to a study by this magazine of NASDR arbitration cases from April '96 to June '97, firms won 87% of the 54 note cases, collecting a total of $3.2 million in damages--74% of the relief they requested. The average total award to firms was $59,940.

Not only do firms go after the amount of the bonus, but most of them also go after interest and attorneys' fees, and for the most part, they get it.

"If it's a well-drafted note, and the broker left on his own or was fired with cause, then the case is heavily weighted in favor of the firm," says Tom Giachetti, an attorney with Stark & Stark in Princeton, N.J. But, if the broker was fired unjustifiably or the firm created an atmosphere in which the broker was unable to perform--a hostile work environment--"then the broker has a fighting chance," he says.

But in general, note cases are losers for reps, and especially painful for brokers who foolishly spend their up-front "bonus." Firms structure these deals in a remarkably similar fashion--as three- to five-year promissory notes of which a percentage is forgiven once a year, or in some cases monthly. Some are forgiven in total at the end of the note period. Bottom line: The money doesn't really belong to the broker until the time period specified in the note is up.

And forget about getting credit for time served. "If you've been there for most of a year, it doesn't matter," explains Armand Salese, a Tucson, Ariz.-based plaintiffs' attorney who has defended brokers in note cases. The firm can fire a rep on the 364th day of a year and go after the money from that year, he says.

The multiyear structure of these notes ties the rep to the firm. "But it also allows for raiding of books," Salese points out. What's to stop a firm from recruiting a broker with an up-front bonus, getting his book and then firing him and collecting on the bonus? "Not enough reps realize how vulnerable they are with these employment contracts/notes."

In another scenario, the firm could fire the rep and let him keep the up-front bonus money. "It's a good ploy for the house to say you keep some or all of the note, and we just bought your $100 million in assets for $100,000," says Salese.

Although there are many note cases, "it's not a conspiracy by the brokerage industry," says Giachetti. "No broker would ever leave if that were the case."

What can a broker do to protect himself or herself? First, when you're being recruited, hire a lawyer who represents plaintiffs/employees. Don't make the mistake of hiring an attorney who represents firms.

It's during the recruiting process when reps are being courted that they have the most leverage, Salese points out. "Draft an employment agreement that protects you and gives you a 'for cause' agreement." That means the firm has to have a reason to fire you--you're not considered an "at will" employee.

Adds Salese: "If a firm doesn't want to do it, you can make an intelligent decision at that point."

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