The Promise Keepers

Q: I have about $154,000 remaining on a forgiveable loan that I received when I joined a major wirehouse in 2001. Recently I was terminated for unauthorized trading in a client's fee-based account. About 3 percent of it was invested in stocks. On the last day of employment, I had $15 million of client assets. Since joining an independent asset management firm, I've only been able to transfer $5 million

Q:

I have about $154,000 remaining on a forgiveable loan that I received when I joined a major wirehouse in 2001. Recently I was terminated for unauthorized trading in a client's fee-based account. About 3 percent of it was invested in stocks.

On the last day of employment, I had $15 million of client assets. Since joining an independent asset management firm, I've only been able to transfer $5 million of those assets. My former co-workers have had a field day with my former clients.

For the last five months, I've been trying to negotiate a settlement with my former firm, but we can't come to agreement. I believe that the $8.5 million in assets which I brought and remained at the firm should be count in some way towards my outstanding loan. Recently I received a note that my case is being submitted for arbitration, which will be avoided/rescinded, only if I pay off the loan balance.

Do I have a legitimate belief that these assets should be valued and taken into consideration?

A:

Arbitration is an equitable forum. This means that an arbitrator is not strictly bound by principles of substantive law and may do justice as he or she sees fit.

In my experience, many arbitrators apply their own sense of equity to the specific facts before them. The right of setoff you describe is an equitable argument that an arbitration panel may, or may not decide to apply in your case.

You should consult with an attorney in your jurisdiction who can advise you on any potential substantive and equitable defenses and counterclaims you may be able to assert in your arbitration.”

Howard S. Meyers
Meyers & Heim LLP
New York City
(212) 355-7188
[email protected]

A:

In my experience, brokerage firms hang pretty tough when it comes to its brokers repaying their loans in full when they depart the firm. Not only that, arbitration-award histories are replete with decisions in favor of brokerage firms in promissory note cases.

Your former colleagues jumped on your clients and your assets like vultures. The firm considers those assets theirs not yours, hence the aggressive attempt to keep all those assets at the firm. It does not help your defense that you were terminated from the firm for a securities violation. Since the firm has filed for arbitration and won't negotiate down much, you don't have much to lose by defending and attempting to gain the sympathetic ear of the panel.

Your arguments are stronger if you brought over clients/assets when you joined the firm as opposed to having obtained them while you were there. You can ask the firm to produce documents in discovery. Ask for documents reflecting the firm's discounting of other broker's promissory notes and documents regarding its waiver of the entire amounts and why that was done. The firm might want to negotiate rather than respond.

Otherwise, calculate just how much money the assets you left behind were generating in commissions and fees to the firm and how much they are likely to generate for the next five years. Then you can better argue to the arbitration panel that they should make some offset to the money you owe the firm.

Tracy Pride Stoneman
Tracy Pride Stoneman, P.C.
Denver
(719) 783-0303
[email protected]

Q:

I'm an honest broker. Two years ago I received my first client complaint. I was accused of excessive trading, unsuitability and fraud by a client who was trying to compensate for losses in tech stocks incurred when the market tanked.

The client retained oversight control of his investments, was required to approve any changes in investment strategy in writing and was given copies of these approvals. The firm denied any responsibility for my actions. In fact, it recommended that the client sue me personally, which the client has done.

My firm filed for bankruptcy. Its assets were purchased by another company. After the new firm took over, it let some employees go, but I wasn't one of them. Recently, however, when it discovered the U4, I was fired.

Neither the bankrupt firm nor its successor is defending me. I've got to get my own defense attorney. Is this right? Also, do I have any recourse against the new firm for failing to investigate the charges before terminating me and failing to provide defense counsel?

A:

Your story is, unfortunately, common in today's securities community, with many firms seeking to avoid customer claims' liability.

However, by shifting the blame to you, the new firm may sadly have created a more difficult situation for both you and the firm because, naturally, you will seek to shift the blame to your former employer. When such contrary positions exist, some arbitration panels may assess liability against both the firm and registered representative because the panel may presume both parties have some liability as a result of the “name calling.” Surprisingly, claimant's attorneys usually sue the firm to seek “deep-pockets,” so I am surprised at their position in your case.

Nonetheless, you still have the unenviable task of defending yourself. Looking to your former firm is a dead-end because it is bankrupt. Further, that firm did not terminate you. Meanwhile, the new firm is not named in the litigation and probably has no liability because firms that sell assets to another company usually do not transfer liabilities such as those arising from customer complaints.

Complicating this matter is your termination. Apparently, the new firm was concerned about a disclosure on your Form U4 that I assume related to this customer complaint. Most registered representatives are employees at will, so the likelihood of recovery against the new firm is severely limited unless you had a specific contract with the new or old firm that the new firm violated.

There are other possible claims, but you do not appear to have a sexual, religious, ethnic, racial, age or disability discrimination claim, nor do you seem to have a whistleblower claim or fall within any other federal or state statutory protected class that would make your termination unlawful.

Thus, without a contract, you probably have no claim against the new firm for your termination or defense costs. Further, since you do not suggest that the new firm was involved in the transactions giving rise to the customer complaint, you will also be unlikely to bring a common law contribution claim against it.

Accordingly, although it was distasteful that the new firm terminated you, the firm appears to have acted in a legal manner, and, absent a specific contractual agreement, you will have to obtain your own defense attorney and pay your own costs.

Ernest E. Badway
Saiber Schlesinger Satz & Goldstein
Newark, N.J.
(973) 622-3333
[email protected].

A:

There are two general types of legal actions: criminal and civil. In a criminal case, one may qualify for a “court appointed” attorney. There is no similar benefit in a civil case. The American legal system requires each participant in a dispute to employ their own counsel. Generally, with a customer claim, the firm's interest and the registered representative's interest are close. As a practical matter, the firm provides counsel for a litigation strategy to “close ranks” with the representative.

If the firm ceases to exist, the firm no longer has a “dog in the fight.” The registered representative is alone and the general rule applies. A variation may occur if the customer names “control persons.” In this case, the former owners (“control person”) may decide a proper litigation strategy would include providing coverage to the representative.

Another alternative would include contacting your state's attorney referral system. Many attorneys accept a case(s) on a pro-bono basis as part of their civic responsibilities.

Gail E. Boliver
Boliver Law Firm
Marshalltown, Iowa/Omaha, Neb
641-752-7757
[email protected]

Ethical Rep is a monthly feature in which more than 30 prominent securities attorneys, experts and law school professors help Rep. readers deal with work-related ethical quandaries. Have you encountered a situation at work that makes you uncomfortable? Are you confused about how your responsibilities to clients might change as regulations continue to evolve? Drop a line to Rep.'s contributing editor, Ann Therese Palmer, and our group of experts will help you work through the problem.

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