In an expedited ruling, the NASD has ordered Smith Barney to fork over nearly $8,000 to a former employee for the legal costs of defending a customer arbitration.
After leaving Smith Barney last year, veteran New York broker Alan Gramaglia incurred $8,216 in attorneys' fees while fighting a short-lived customer arbitration arising from his employment there. Smith Barney balked when he asked for reimbursement, with the firm claiming the quickly dismissed case could have been handled by its in-house attorneys.
But Gramaglia, a 24-year veteran of the firm, was at the same time involved in a wrongful termination dispute with Smith Barney that pre-dated the customer arbitration. He argued that Smith Barney could not then defend him in the separate customer case.
Gramaglia subsequently filed an expedited arbitration with the NASD in April '97. In September, an NASD arbitrator decided in his favor, ordering the firm to pay up.
In its written arguments to the NASD, the firm said the limited partnership caseat issue could have been handled easily by its in-house counsel. Smith Barney claimed that the case, filed by former client Marie Sacco in September '96, " ... was clearly ineligible for arbitration under New York law because the events at issue took place well over six years prior to the filing of the arbitration." Claims older than six years are barred from arbitration. Smith Barney attorney Etta Gumbs concluded that Gramaglia didn't need outside counsel, and the fees generated by his doing so were "excessive."
Gramaglia's attorney, Joel Leifer, in New York City, now says that Gramaglia was under no obligation to use Smith Barney's in-house counsel on the customer claim and that the firm, under Delaware law, was obliged to reimburse the costs of an outside attorney regardless of whether a conflict existed with the firm.
"If the expense you incur arises out of your employment, there's no question the employer is entitled to indemnify you, unless you're found criminally liable," Leifer says. Furthermore, he adds, the Code of Professional Responsibility, which is statutory law in New York, prohibits a law firm from representing a client when that firm has an interest adverse to the client.
"Because of the other litigation, Smith Barney couldn't represent him," Leifer says. "They were in conflict."
Leifer would not elaborate on Gramaglia's pending arbitration with Smith Barney.
Arbitrations do not set precedents as do court rulings, says Randal Steinmeyer, a securities attorney in Minneapolis who frequently represents brokers in arbitration disputes. As a practical matter, he advises that in most customer arbitrations, brokers should seek outside counsel because their interests are different from firms'. Rarely, however, should they expect to see reimbursement from the firm, he says.
"You don't usually see a retroactive attempt to get money back. I've seen cases where a brokerage will agree up front to pay for another attorney, maybe where there's a potential conflict. They may feel less risk the broker's going to turn against them."
David Bartholomew, a securities attorney in Long Beach, Calif., who has represented Smith Barney in the past, says brokers and firms quite often have unified interests in defending customer litigation. As such, brokers can sometimes waive the conflict of interest they may have in an employment issue without jeopardy.
"Just because there's a conflict under the letter of the law, doesn't mean there's a practical conflict," he says. "I don't see how there would be a divergence of interest on a 10-year-old limited partnership claim" like Gramaglia's.
Smith Barney did not return phone calls.