Shelter From the Storm?

It's an all too common occurrence on the Street these days: a client sues her rep, the branch office manager and the broker/dealer. Or maybe it's a regulator who launches an investigation involving those same parties. The stakes are high. Reputations are in danger. Thousands of dollars in damages and fines hang in the balance, as does industry certification. And with all that, many reps still choose

It's an all too common occurrence on the Street these days: a client sues her rep, the branch office manager and the broker/dealer. Or maybe it's a regulator who launches an investigation involving those same parties. The stakes are high. Reputations are in danger. Thousands of dollars in damages and fines hang in the balance, as does industry certification. And with all that, many reps still choose to let the b/d's lawyer represent them — often simply because he's provided “free of charge”. Big mistake.

Joint representation — the practice of having one attorney represent multiple parties — is generally permissible under state law, provided the lawyer makes adequate disclosure about material conflicts of interest and the like to the involved parties. But the fact that it's allowable doesn't make it beneficial to all parties. For multi-party representation to work effectively, the lawyer essentially becomes the hub, and the spokes — the clients — must entrust confidential information about what they did and didn't do, and what they really did and didn't do. Before putting yourself in this situation, you might want to take the following facts into consideration.

Under the terms of most joint representations, the b/d can still seek indemnification from the rep. This means that if an arbitration panel finds the b/d liable for $100,000 in damages in a public customer case and you were the registered rep, the b/d can turn around and sue you for that amount — even if you were sharing its counsel. Further, notwithstanding the joint representation, the b/d still can impose internal sanctions against you, including garnishing your commissions or demoting, suspending or terminating you.

But let's assume that you play ball with your employer — maybe you even soft-pedal aspects of the case that are beneficial to you but which might cast the b/d in an unfriendly light. Hey, we're all in this together. Right? Well, not really. Keep in mind that the regulators require the b/d to inform them of all regulatory matters and of the resolution of litigated items. You'll probably get that old line about how much they appreciate you being a class act but their compliance department and legal department insist that the “official” explanation places most of the blame on your shoulders. Your manager might even give you the old “nothing personal” speech — just before escorting you off the premises. Now, not only are you out of work; you'll need to hire a lawyer to defend you against regulatory charges.

At the start of most litigation, everyone usually talks tough and makes promises about fighting the charges. Then one day the joint attorney calls and informs you that, solely for economic reasons, the b/d has decided to settle the case for $50,000. You adamantly protest the settlement, because you did nothing wrong. But that doesn't matter: The firm has written the check, and it's already been sent to the client. You are furious because from this point on you will have a blemish on your record because of the dollar amount of the settlement. Look it up: Form U-4, Question 14I: The determining factor is not the amount you personally pay towards a settlement; it is the dollar amount ($10,000 or more) by which the matter got settled, regardless of who contributed to the settlement.

Ultimately, then, it could prove more costly to have used the “free” counsel provided by your b/d than to have hired your own lawyer to begin with. New counsel will likely charge you a hefty fee to review everything that happened on former counsel's watch and will then charge you to handle your case going forward.

Economic realities being what they are, it is likely that many registered reps will continue to avail themselves of “free” joint representation. If you must do so, at least follow these guidelines: insist that joint representations be undertaken pursuant to a written agreement and always retain an independent outside counsel to review the written agreement and fully explain its terms to you before you sign it.

Writer's BIO:
Bill Singer
is a partner with the law firm of Gusrae, Kaplan & Bruno. rrbdlaw.com

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