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An Instructive Employee Promissory Note Case (FINRA Arbitration)

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May 6, 2010 3:48 pm

An Instructive Employee Promissory Note Case (FINRA Arbitration Case)

About a year ago, on May 22, 2009, the more formal litigation phase of this mess began when Claimant Wedbush Morgan Securities, Inc. (WMS) filed a FINRA Arbitration Statement of Claim against Respondent John Buckingham. The dispute isn't all that unique -- it's somewhat of a garden-variety case in which WMS alleged a breach by Buckingham of the terms of a Promissory Note dated December 15, 2006 (Note), and, for good measure, the Claimant tossed in claims for Breach of Contract and Unjust Enrichment. Respondent Buckingham generally denied the claims and filed his own Counter-Claim for Breach of an Employment Contract. In the Matter of the Arbitration Between Wedbush Morgan Securities, Inc., Claimant, versus John Buckingham, Respondent (FINRA Arbitration 09-02996 May 3, 2010).

This Could Get Expensive

Claimant WMS sought:

$87,017.05 in compensatory damages for the principal owed on the Note from the date of Buckingham’s resignation from the FINRA member firm; $5,200.00 in accumulated interest at the rate of 5.5%; $2,812.00 in attorneys’ fees; $6,050.00 in costs; and $3,732.00 in additional damages.

Going tit for tat, Respondent sought compensatory damages of $5,824 for back-pay plus reasonable interest, and an additional $90,000 for undue stress, financial hardship, and damage to his credit because of the alleged violation of his employment agreement by Claimant.

The No-Show

Okay, so the trenches are dug and the two opposing armies are ready for battle – except, Respondent Buckingham did not appear at any hearing, even though FINRA’s records showed that he was served with the Statement of Claim (he submitted a Statement of Answer, Counterclaim and a signed Submission Agreement in July 2009), the notice of the hearing date, and a warning that the matter would proceed regardless of his presence (or not). As you may have anticipated, not showing up isn't the greatest of legal strategies.


The FINRA Arbitrator ordered that Respondent Buckingham pay:

$87,017.05 in compensatory damages; $5,200.00 in accrued interest at the rate of 5.5%; $2,812.00 in Attorneys’ fees; $6,050 in costs; and $3,732.00 for cash out-of-pocket taxes and 401(K) costs paid on his behalf.

The sum of those awards is a whopping $104,811.05 -- nearly 20% above the principal balance of the Note.

Bill Singer's Comment: I offer this case because it provides fair warning to industry employees as to the consequences of not repaying or not settling disputed employee forgivable loans (EFLs), bonuses, or promissory notes. It also may help some of you better understand the balancing act between settling versus dragging things out through litigation.

After reading this case, you may ask what was gained or lost by nearly one year of litigation, as evidenced in the time it took from the date this arbitration Complaint was filed until the Arbitrator issued the decision. You may also wonder whether the failure to settle this case before a verdict was issued was the result of ineffective settlement negotiations, Respondent's lack of funds to repay the disputed debt, or a flawed understanding of the additional financial risks involved when playing the game of chicken. Those are all good questions. In fact, if you're ever confronted with this situation, make sure to ask them.

Why might Buckingham have better better advised to have settled? For one thing, he might have avoided a nearly 20% premium above the disputed principal balance -- in fact, he might have even been able to extract a discount off of the $87,017.05 in dispute. It may well have been possible to settle for $75,000 (or less or more). Instead, Buckingham now finds himself saddled with a six-figure award and if he fails to timely pay that amount, he could well be barred from the industry by FINRA.

If you lose a FINRA arbitration, you have an obligation to pay the award. In lieu of timely payment, a respondent may assert certain limited defenses in an expedited suspension proceeding commenced pursuant to Procedural Rule 9554. These include:

(1) the award has been paid in full;

(2) the parties have agreed to installment payments of the amount awarded or have otherwise agreed to settle the action;

(3) the award has been modified or vacated by a court;

(4) a motion to vacate or modify the award is pending in a court;

(5) the respondent has a bankruptcy petition pending in U.S. Bankruptcy Court pursuant to Title 11, or the award has been discharged by a U.S. Bankruptcy Court.

Although respondents may also assert a bona fide inability to pay the award., that defense may likely disapper. See the links below: 

Am I an idiot who doesn't get it? Hopefully that's a false assumption on your part. Of course I understand that Buckingham may well have been broke and lacked the necessary funds to repay the principal. The Great Recession has taken a horrendous toll on many registered folks. Trust me, I get it.  Nonetheless, if you can't pay, then you may well want to consider seeking a discharge in bankruptcy or exploring the willingness of the Claimant to work out some payment schedule or reduction in the awarded damages.

Did Respondent Buckingham gain anything from not settling and going to a FINRA arbitration hearing? For one thing, he was able to forestall any payment for nearly a year while this case made its way through FINRA's arbitration forum. Was that delay worth it? Depends. If during that time, Buckingham was able to earn the necessary funds to repay the anticipated award, perhaps that made sense. If he just needed the breather and now intends to file for bankruptcy, perhaps that strategy was sound. The lesson here is to be prepared for the consequences of losing a contested FINRA arbitration hearing. You may wind up owing far more than just the underlying debt. You could expose yourself to the loss of your career.


The annual meeting of FINRA firms will take place on or about Monday, August 2, 2010, to elect individuals to fill the seven Elected Governor seats on the FINRA Board of Governors (FINRA Board). .

There are

three (3) Small Firm Governor seats, one (1) Mid-Size Firm Governor seat, and three (3) Large Firm Governor seats up for election.

Ever so kind and helpful , FINRA has its own nominating committees and they haved come up with a recommended slate of nominees.  The best and the brightest culled from the ranks of thousands of registered folks and member firm executives. Or so those nominating committees would like you to think. Or so we would all so desperately hope.

Time for a FINRA Tea Party?

Alas, I've seen the lists of the official nominees.  I despair. 

Like some frightening Boys from Brazil, the FINRA nominating committees have gone back to the same gene pool that produces the same lookalike, soundalike offspring from the same trade groups and member firms.  In times that demand a shift into forward or reverse, we will be stuck in neutral with an idling engine.

If now is not the time for substantive, meaningful change on Wall Street, then when is? 

Incompetent regulation and inept regulators must be replaced by progressive, pragmatic policies and executives who will prevent a recurrence of the recent industry debacle.  Now is the time for your voice to be heard at FINRA. 

Organize!  Mobilize!! Nominate Your Own Independent Candidates!!!

Here are the steps you need to take:

FINRA Petition Process for Additional Candidates

Pursuant to Article VII, Section 10 of FINRA’s By-Laws, a person who has not been nominated for election to the FINRA Board may be included on the ballot for the election of governors if:

(a) within 45 days after the date of this Election Notice, such person presents to the Secretary of FINRA petitions in support of such nomination, duly executed by at least three percent of FINRA member firms entitled to vote for such nominee’s election. If, however, a candidate's name appears on a petition in support of more than one nominee, the petition must be endorsed by 10 percent of FINRA’s voting member firms entitled to vote for such nominee’s election;


(b) the Secretary certifies that such petitions have been duly executed by the executive representatives of the requisite number of FINRA member firms entitled to vote for such person’s election, and the person being nominated satisfies the classification of the governorship to be filled based on the information provided by the person as is reasonably necessary for the Secretary to make the certification.

As of the close of business on Monday, May 3, 2010, the number of FINRA Small Firms, was 4,324; the number of Mid-Sized Firms was 214; and the number of Large Firms was 176.

Firms may only endorse a petitioner for the same firm size seat as their own and, in the case of petitions, solely in support of a single nominee. No firm may endorse more than one such nominee. Likewise, a firm that signs a petition in support of more than one nominee may not submit a petition in support of an individual nominee. In this election, there are three separate Small Firm and three separate Large Firm seats.

The petition must identify the seat for which the petitioner is seeking to be nominated. The petitioner must submit sufficient information to determine the person’s status with respect to the category for which he or she is petitioning to be nominated. The petitioner must also provide information sufficient for the Corporate Secretary to determine that the petitions are duly executed by the executive representatives of the requisite number of applicable size firm members.

Petitions must be submitted no later than Friday, June 18, 2010.

The names of persons obtaining the requisite number of valid petitions will be included on the appropriate proxy mailed to eligible firms in advance of the annual meeting.

Voting Eligibility

A proxy will be mailed, along with the notice of the annual meeting, to each eligible FINRA firm prior to the annual meeting.

Firms are eligible to vote for the nominees who are running for seats that are in the same size category as their own firm. Therefore, Small Firms and Large Firms may vote only for the candidates running for the seats reserved for their firm size, and Mid-Size Firms will likewise vote only for the Mid-Size Firm seat.

FINRA will verify the size of each firm on the day the proxies are mailed. Each firm eligible to vote will receive a proxy containing the nominees for their voting class.