During the heady days of the bull market brokers found themselves lured to other firms by big upfront bonuses, in the form of forgivable loans. For an increasing number of brokers, chasing the filthy lucre has had disastrous results. Unable to maintain prior production rates under worsening market conditions, many have lost their jobs and their clients.
Now their firms want to collect.
The case of William Roche is becoming typical. As part of an agreement before joining UBS PaineWebber in 2000, Roche agreed to bring 80 percent of his assets with him, and accepted an upfront loan of nearly $100,000 — to be forgiven over five years. A little more than a year later, he says, the firm issued new sales targets for him. After failing to make those quotas, Roche says he was let go and PaineWebber demanded $80,000 back.
Roche believes firms are setting brokers up for failure, while bringing more business in for themselves in return. “They're leading people down the aisle and then leaving them at the altar,” he says. He is currently in the midst of a wrongful termination suit against PaineWebber. “They're well-dressed crooks hijacking people's business,” he says.
PaineWebber didn't return a call for comment.
Mark J. Astarita, a New York securities lawyer, says most brokers will be forced to pay back the loan, citing the promissory note. But several defenses could help a broker win a counterclaim.
Since firms are within their rights to collect if termination due to lack of performance occurs, brokers need to prove a breach of contract occurred. A broker can countercharge that promised resources, such as a dedicated sales assistant, weren't provided.
Or, a broker can argue that an environment that would have allowed the broker to repay the loan (a bull market) no longer exists. According to an SIA study, reps' total earnings plummeted an average 17.7 percent in 2001. The change in circumstances was beyond the control of either broker or firm, and can be used as another defense.
However, this is often difficult to prove.
Some firms are “using an industrywide market decline as an excuse to ruin careers,” says William Jacobson, a securities lawyer in Providence, R.I., and a columnist for this magazine (see page 93).
Once brokers bring over assets, the firm has less incentive to keep the brokers, and since many contracts were signed during the bull rush, a bear wasn't accounted for. “It's becoming more common,” says Astarita.