Citigroup Wins Long, Strange CAP Battle

Another assault on deferred compensation fails. After going two for three in a unique tug of war involving both the arbitration and court systems, former Smith Barney broker James McCarthy is likely throwing in the towel in three-year fight for money left in his deferred-compensation plan.

Another assault on deferred compensation fails. After going two for three in a unique tug of war involving both the arbitration and court systems, former Smith Barney broker James McCarthy is likely throwing in the towel in his three-year fight for the money left in his deferred-compensation plan.

“We’ll consider our options from here,” says McCarthy’s lawyer, Bill Jacobson, of Providence, R.I. “But there aren’t many options after this.”

The ruling by the U.S. Court of Appeals, which was issued in late September, reinstates an original arbitration panel decision from 2004 in support of the legality of Citigroup’s Capital Appreciation Plan (CAP), a frequent target of lawsuits from departing brokers. For McCarthy, it means he won’t see a penny of the $287,000 in money he contributed to CAP and forfeited—per the plan’s rules—when he left.

McCarthy, a 20-year veteran of the firm, was once among the top 5 percent of producers at Smith Barney and a member of the elite Director’s Council. When Citigroup became embroiled in the research/investment banking scandal in 2003 and Jack Grubman and Citigroup were in the newspapers every day, McCarthy says he had to leave. “They sold out the retail brokers, period,” he says. So he left and formed Seascape Capital Management, an independent RIA in North Hampton, N.H. But he left $287,000 behind. He said it was his; Citigroup says it belongs to Citi—and the second-highest court in the land agrees.

The Court of Appeals ruling is the fifth and final ruling in a rare Ping-Pong-like exchange between the arbitration panels and the district court system. (To read more about Citigroup’s CAP plan and McCarthy’s unusual three-year fight, click here.) McCarthy lost his first arbitration, appealed to a district court and won the right to a second arbitration, which he lost again, then won yet another appeal and the right to a third arbitration. However, Citigroup appealed to the U.S. Court of Appeals to reinstate the original arbitration ruling and won, putting an end it seems to another fight over CAP.

John Skelton, an attorney with Bingham McCutcheon in Boston, and Citigroup’s attorney in the proceeding, had this to say about the Appeals Court ruling: “If the law was that the courts should always second guess the legal analysis of arbitration panels, we wouldn’t have arbitration.”

Jacobson, McCarthy’s attorney, agreed that the Court of Appeals doesn’t like lower courts to “look behind arbitration judgments,” but says the outcome is disappointing for many reasons. “They [the Court of Appeals] want to be shown that the arbitration panel understood the law and deliberately ignored it,” says Jacobson. “No one disputed that we were right under New Hampshire wage law,” he says. “Unfortunately, just because the arbitration panel was wrong is not enough to overturn the case.”

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