In this market, it is no wonder that customers are looking to recover losses any way they can. Even clients responsible for their own lousy picks are trying to pick the deep pockets of brokerage firms, claiming that they never would have racked up such losses if the firm and the broker had not been negligent or failed to meet some duty to the customer. Customer claims filed with the NYSE and the NASD are expected to hit an all-time high in 2002.
If you are the target of a complaint, you need to quickly assess where your interests and those of the firm lie. There may be a rough parity of interest between the broker and the firm if the broker still works there. The disparity in interests may be much wider when the complaint is filed after a broker has moved to another firm. Even where the employment relationship continues, the reality is that settlement is dictated largely by the firm, and its approach will depend on the nature of the claim and the amount of money at stake.
A firm may decide to settle a claim despite a broker's desire to aggressively litigate. This was the case with the Salomon Smith Barney brokers who handled the WorldCom stock option sales (Registered Rep. March, 2002). When they felt the firm was not backing them up, they turned around and sued, also naming analyst Jack Grubman.
The divergent motives are clear: The broker wants vindication; the firm wants to move on.
A broker must first evaluate whether he needs his own lawyer. It ill-behooves a broker to let a firm provide counsel and control the entire defense of a claim. The free ride may be illusory.
The obvious concern with a common defense and common lawyer is that the broker may not be given a full, fair and accurate assessment of risk, potential exposure and liability. Not getting an objective evaluation of the broker's legal position can be significant. Except for a financial payment, the firm's exposure in a settlement or loss in arbitration is negligible. In some cases, the firm will insist the broker contribute (in whole or in part) to the cost of the settlement.
However, for the broker, the risk is not just financial. He might find himself facing discipline by the firm or a regulatory group, such as the NASD, suffer an adverse arbitration or even termination. The U-5 Termination Form has an entire section called “Customer Complaint Disclosure.” One inquiry in that section asks whether the broker was party to any arbitration involving a customer complaint that was settled or resulted in an arbitration award.
Thus, the manner in which a broker handles an investigation or filing of a customer complaint at the outset can be critical. A broker's separate counsel can evaluate whether alleged conduct poses administrative or legal risks for the rep.
A broker also should want to know whether documents or information in his possession or under his control pose legal or professional risk. While discovery in arbitration is more circumscribed than is permitted in court litigation, the claimant's lawyer is likely to be vigilant in seeking e-mails, voice messages, tape-recorded phone conversations, notes and memoranda. Subpoenas may be used to disclose off-handed conversations with colleagues and others. Computer databases, Palm Pilots, BlackBerry handhelds and all such other repositories of information are a treasure trove for an aggressive lawyer.
A broker should have an independent advisor with a trained eye examine relevant documents, including ones maintained outside the workplace. The broker also needs to learn what documents and information must be preserved.
Where a complaint has instigated an investigation, the broker is well advised to seek counsel in advance regarding whom to talk to and how much to say. There is a fine line that separates a broker's obligation to assist his employer in an investigation and insubordination for refusing to cooperate until the broker has consulted with counsel. Most firms won't be offended if a broker consults an attorney to protect his rights, though the employer may not provide the lawyer much information. But it's a little late to seek counsel after a broker has made damaging statements or disclosures, because options have been lost and strategy may have been compromised.
In some cases, separate counsel may not be warranted. But it's always best to get an objective analysis. In this environment, the old rules of loyalty and common sense simply do not apply.
Jonathan P. Arfa is a New York employment lawyer representing brokers.