Up Front Bonus Loans and Laid Off Brokers

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Sep 7, 2009 12:57 am


By Dobin & Jenks (all)

Any broker who has moved from one firm to another has heard about, or received, them. They go by various names - Transitional Compensation, Employee Forgivable Loan, and Recruiting Bonus are among the names given to these payments. Essentially, the brokerage firms are hiring experienced brokers and “loaning” the broker money to ease the transition between firms. If a broker is successful at moving the vast amount of his or her production, then the forgivable loan becomes extra money in a good year.

But the past 18 months have been lean ones for brokers. Clients are unhappy. They are hesitant to change firms and follow a broker whom they blame for their losses. Brokers whose books of business are fee-based have seen their fees decrease as their clients’ account values decrease.

Even worse off are the bottom quintile (20%) of the production force. The brokerage firms view these brokers, many of whom may have been better producers during better times, as expendable. As part of the consolidation and contraction of the brokerage business, the firms are letting these lower producers go. And the firms want their money back.

I have spoken with an in-house lawyer at a major wirehouse who told me that his firm’s collection people are aggressively pursuing these lower quintile producers who were fired or let go in a “reduction in force” layoff. In today’s economic times, this hardly seems fair that a broker is hit with the double-whammy of a loss of a job and a demand for repayment from an employer who no longer found the employee desirable. This does not make sense.

Virtually all of these cases must go to arbitration. Soon, we will begin to see an increase in the filing of collection case against former employees. In about nine to twelve months, we will see an increase in arbitration decisions. It will only be then that we will know whether the arbitration system thinks that these firms were being fair.

Full post as published by The Law Planet Blog on April 17, 2009

Sep 8, 2009 2:32 pm

Something just strikes me as wrong about that.  Inherently inequitable to pay a bonus, then reduce the workforce, then demand that bonus be returned.

Sep 8, 2009 3:00 pm
Former Citi Broker Sues Over Forgivable Loan Repayment

Aug 13, 2009 3:57 PM, By Halah Touryalai


An Ohio based financial advisor is asking Smith Barney to forget about that loan he owes them which stems from a sign-on bonus. In fact, he alleges, the original contract he signed with his old firm is unenforceable and void.

Thomas Ba*** says Citigroup offered him a $45,675.36 recruiting bonus structured as a forgivable loan over seven years in 2004 when he joined the firm. When Ba*** resigned from his job in 2006, the firm requested that the portion of the loan he had not repaid, corresponding to the remaining five years in the loan terms, be paid back with interest immediately, therefore �accelerating the note��a standard practice in the industry. For Ba***, that debt adds up to $39,150.31.

According to the class action complaint, which involves over 500 employees, �Because the defendant may terminate the employment and accelerate the note at will, with no loss to itself, with or without prior notice, this is an illusory contract, with lack of mutuality and lacking any consideration for the executory portion of what is essentially a unilateral contract. The employee, on the other hand, must pay an accelerated note with accumulated interest if he or she decides to terminate employment with Defendant.� In other words, the acceleration and interest clauses are �unconscionable,� one-sided and unfair to one party.

�The firm is saying the advisor has a loan requirement he or she has to meet once a year. But all of a sudden, they want the money all at once the day the advisor leaves. Well, then it doesn�t look like a loan anymore when you do that. It looks like you�re punishing the broker for leaving,� say Mark Thierman, a lawyer representing Ba***. (Thierman was the architect behind the class action overtime lawsuits against Wall Street firms.) The complaint says penalty for termination of employment is unlawful and unenforceable by statute.

�We believe the suit to be without merit and we will defend ourselves against these claims,� says Citigroup spokesperson, Alex Samuelson.

There�s likely to be similar suit against the remaining Wall Street wirehouses since most of them offer forgivable loans with similar terms. �It seems to be happening a lot more because advisors are leaving their firms not because they want to, but because the firm they liked working for is now owned by someone else,� Thierman says.

Ba*** is asking that repayment of his forgiveble loan be voided, or, at the very least, not be required in one lump sum.