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Street Legal: When the Best Defense Is a Good Offense

Street Legal: When the Best Defense Is a Good Offense

How FINRA arbitrations can backfire on employers.

On its face, this case is about as plain vanilla as could be. Former employee leaves firm owing a balance on a promissory note. Former employer wants repayment. Former employee likely is royally ticked. To pour fuel on this fire, there is another testy issue about wrongly withheld commissions. No one is giving an inch, and we're headed for a FINRA arbitration.

In a claim filed Jan. 20, 2010, Wells Fargo Advisors (formerly Wachovia Securities) sought to recover from Joseph Morgan $14,090, representing the unpaid balance due on a promissory note; $4,227 in collection costs; and $1,475 in FINRA filing fees. Morgan filed a counterclaim for $16,126 in commissions owed. In the Matter of the Arbitration Between Wells Fargo Advisors, LLC f/k/a Wachovia Securities LLC, Claimant, versus Joseph Morgan, Respondent (FINRA Arbitration 10-00284, August 19, 2010).

The single FINRA arbitrator hearing the case found Morgan liable for $14,090 in compensatory damages but denied all other damages. But hold on there — this case isn't over. The arbitrator also found Wells Fargo liable for $16,126 in compensatory damages on Morgan's counterclaim. Wells Fargo has to pay to Morgan the net award of $2,036. Both fighters are on the canvass, but Morgan manages to get to his feet by the count of nine.

What is clear from the caption of the FINRA arbitration is that Wells Fargo/Wachovia started this mess but Morgan finished it. And before some of you cynics chime in, Morgan represented himself and Wells Fargo was not represented at the hearing by a law firm — Michael S. Colombo of StreetWide Asset Recovery Group, Inc. handled the firm's case. So stop blaming lawyers for ramping up industry litigation. Gimme a break!

Return to Sender

Contrary to popular belief, lawsuits are not necessarily effective ways for employers to “send a message.” In theory, taking the hard line with settlements and regularly forcing disputes into court or arbitration is supposed to foster the quick resolution of cases for top dollar as former employees quake in their boots with fear. Indeed, that theory is reinforced by every victory.

However, proponents of this take-no-prisoners approach really can't afford so much as one loss out of a hundred. It's that one loss that becomes legendary and is circulated around the industry. It's that one case that gets written up in the “Street Legal” column of Registered Rep. and takes on an afterlife for years to come as an e-mail attached file, as a photocopy in a file drawer, as a linked result to an online search. Without question, this case sets back Wells Fargo/Wachovia far beyond the mere $2,000 net loss.

The first thing that went awry with Wells Fargo's strategy against Morgan was that he counterclaimed. Morgan forced his former firm to defend itself against his demands for commissions allegedly owed and wrongfully withheld. That changed the dynamic from one in which the former employee is typically depicted in these promissory-note arbitrations as a despicable, lowlife deadbeat, to a case in which the employee also appears as a victim.

Moreover, by representing himself, Morgan eliminated Wells Fargo's ability to bleed him dry by forcing him to pay legal fees during the hearing. That was quite a gamble because Wells Fargo was seeking the award of some $20,000. More often than not, when stockbrokers act as their own lawyers, the effort takes on the worst characteristics of amateur hour. Not only could Morgan have wound up on the hook for the full demand made by Wells Fargo, but he could well have lost his own demand for owed commissions. Nonetheless, acting as his own lawyer, Morgan was able to send his own message back to the firm: Hey, I'm going the distance here. It's not costing me a penny in lawyer's fees. That the arbitrator awarded Wells Fargo most of its claimed damages will soon become an overlooked fact.

The inevitable takeaway of this and similar cases is that you can beat your former employer if you hang tough, go to the mat, and counterclaim. In seeking to recover a relative pittance, this major employer has merely emboldened future former employees. A classic example of getting hoisted on your own petard.

Writer's BIO:

Bill Singer
is the publisher of and

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