When advisors lose their jobs but decide to keep loans or other payments from their former employers, expensive legal trouble can follow. The issue is how much, if any, of the money they received when they first joined the company is cash they are entitled to keep when they depart.
Take the remarkably short-lived relationship between Citigroup Global Markets Inc. and Daniel Joseph Henrichs. In November 2008, Citigroup hired Henrichs as a financial advisor and executed a promissory note with him. The note required installment repayment commencing on the anniversary date of employment, and upon termination, the outstanding balance would become immediately due and payable. Henrichs was dismissed just about a month after he was hired, and Citi went looking for nearly $1 million it said had been loaned to Henrichs. In a FINRA arbitration claim filed in February 2009, Citigroup alleged that Henrichs failed to repay the principal balance due. (In the Matter of the Arbitration Between Citigroup Global Markets, Inc. and Daniel Joseph Henrichs, FINRA Arbitration 09-00882, March 1, 2010.)
In addition to generally denying Citigroup's allegations, Henrichs counterclaimed that the amount owed was actually awarded to him as special compensation in the form of a financial inducement to lure him from his former employer. Henrichs accused Citigroup of breaching its duty of good faith when it wrongfully terminated him, which Henrichs further alleges constituted a breach of contract that rendered him unable to secure employment. Rather than be required to repay the disputed sum, Henrichs sought a judgment deeming him the rightful owner of the money in dispute. Citigroup and Henrichs both sought damages of approximately $959,000, and Henrichs sought expungement of the termination explanation from his Form U5.
Without even a cursory explanation for its ruling, the panel awarded Citigroup the sum of $959,297 in compensatory damages and dismissed Henrichs's counterclaim.
Many of you would nod approvingly at Henrichs's characterization of so-called forgivable loans/promissory note deals as legal fiction. You see the disputed payment as a fully-earned, up-front bonus; it's bad enough that your employers get to play some shell game. But why do these arbitration panels continue to sanction this practice? Sadly, the decision in Citigroup v. Henrichs offers no answers and no explanations. Which may lead you to believe that the FINRA arbitration process is stacked against registered representatives — no matter what, you just can't win.
The outcome was somewhat less one-sided in another Citigroup dispute with a former advisor.
In a FINRA arbitration claim filed in November 2008, Citigroup asserted breach of employment contract arising from Lloyd Laughlin's termination in February 2008, and his alleged failure to repay five “financial advisor bonus repayment agreements,” which Citigroup said were immediately due upon Laughlin's termination. (In the Matter of the Arbitration Between Citigroup Global Markets and Lloyd Laughlin, FINRA 08-04169, February 8, 2009.)
Laughlin denied the allegations and asserted a counterclaim alleging, among other things, that Citigroup breached the terms of his agreement with Citi's predecessor firm, Legg Mason Wood Walker, by making material alterations to the agreement in order to reduce his compensation. Laughlin accused Citigroup of altering the manner in which management fees that he earned from his clients were accounted for, which lowered his production and caused him to suffer losses. Citigroup generally denied those allegations, and specifically alleged that as an at-will employee, Laughlin's employment, compensation, and benefits could be terminated at any time without notice or cause.
Citigroup requested $142,444 in compensatory damages plus interest, fees, and costs. Laughlin requested $70,000 in compensatory damages. The FINRA Arbitration Panel found that Laughlin owed Citigroup $18,000 in compensatory damages, interest and attorneys' fees, plus court costs. His counterclaim was denied.
Just doing the rough math, Citigroup demanded about $142,000 in damages and came away with under $20,000 in damages and fees, plus a bill for some $14,000 in hearing session fees — that is about a $5,000 net after some two years of litigation. Not much of a victory.
Laughlin is on the hook for about $24,000 in damages and costs, and probably a pretty hefty legal bill of his own. However, if I'm the referee in the middle of the ring, I'm holding up Laughlin's hand at the end of the match.
Bill Singer is the publisher of RRBDLAW.com and BrokeAndBroker.com