Brokers Still Leaving Wirehouses

Over the last two years our practice has seen a marked increase in brokers who are leaving wirehouses. We have always represented advisers who are changing firms, but with the mergers of Merrill Lynch and Smith Barney into their former competitors, there has been a significant increase in these matters. We are also seeing an increase in the switch to becoming an investment adviser, something which we have been recommending for years

InvestmentNews.com, in an article titled Why more than 7K reps left the big brokerages in 18 months takes a look at the broker movement. From poor management decisions to material changes in compensation and business philosophy, its no wonder brokers are leaving their firms and becoming investment advisers.

Starting and operating an investment advisory firm is not difficult, and there are less regulations and red tape than at a large broker-dealer. Still, the move is not for everyone, but with the right mind-set and business model, an investment advisory firm has become the answer for many wirehouse representatives.

Another Award Against a Firm For Reneging Compensation

Maybe the investment banks will learn that you cannot unilaterally decide not to pay their employees? Another FINRA arbitration panel has just awarded an investment banker, who alleged Barclays used the collapse of former employer Lehman Brothers to seek to renege on a compensation agreement, over $700,000 in compensation. The Panel also ordered Barclay's to pay the entire amount of hearing session fees for the arbitration, and interest.

Just last week a FINRA arbitration panel awarded two Merrill Lynch brokers nearly $1.2 million dollars for allegations that Merrill reneged on its written policy regarding payment of deferred compensation. The brokers left as a result of the merger with Bank of America, and alleged that they were entitled to their deferred compensation. The Panel apparently agreed. Our post on the case is here.

These cases are good news for employees who have been denied compensation from the investment banks in 2008. As far too many financial professionals are aware, many firms fired employees at the end of 2008 in order to avoid paying bonuses, or in order to collect the balance on outstanding promissory notes. Other firms forced brokers to repay significant portions of their notes years ahead of time or face termination, and others simply decided not to honor their commitments to their employees.

We are representing financial professionals in a number of these cases, in some cases to obtain the compensation they were entitled to from their old firms, and in others to obtain damages from the firms for wrongful termination. Time and time again we hear similar stories from brokers and other professionals regarding flagrent mistreatment by some of the investment banks, including trumped-up termination charges, along with dirty U-5s. The firms do not seem to care in the least that they are denying compensation to their own employees, harming their families and in many instances, destroying careers.

Ultimately, the firm does not get away with such conduct, but the employees need to commence arbitration proceedings to recover that which they were entitled to. Isn't it time for these firms to act like responsible corporate citizens and to stop trying to balance the books by reneging on their agreements with their own employees?

The award is available at the FINRA web site - Whalen vs. Barclays Capital

Merrill Brokers Win $1.167 ML Arb Award For Retained Comp

For those who believe that the wirehouses would not deny compensation to an employee simply to save money, this article from Registered Rep provides some telling information. According to the article, Merrill Lynch's employee policies provide that a broker who resigns for "Good Reason" is entitled to have his deferred compensation benefits vest at the time of his resignation.

According to the article, at the time of its merger with Bank of America, brokers were leaving, and Merrill canceled the deferred comp benefits, and simply refused to pay out any funds for a "Good Reason" resignation, something Merrill Lynch had agreed to in the compensation plans.

Why would Merrill Lynch unilaterally breach an agreement with its employees? We have represented brokers against a number of wirehouses in this sort of situation, and the firm always has an excuse. "Good Reason" doesn't really mean "Good Reason", or we were going to fire him, or his reason wasn't really good, or some technical defense that is obviously a ploy to avoid paying.

When the broker points out the obviously ploy, and claims that they denied benefits or compensation to a particular broker as a cost saving measure , the firm chuckles in a smug way, claiming that the firm is so big that an individual broker's compensation would have no effect on the bottom line, and such a claim was absurd.

Really. According to the article, the value of the stock and cash that Merrill refused to pay its departing brokers was significant - between $100 million and $300 million dollars. Sure, one broker didn't make a difference, but deny all of the departing brokers their compensation, and you are talking about a significant sum of money. The theory is, I suppose, deny all of them compensation, a few will sue, but all of them will not, and we will be ahead of the game even if we lose the arbitrations.

A FINRA arbitration panel just awarded two Merrill brokers over 1.1 million dollars for this conduct. Unfortunately, no interest and no attorneys fees were awarded so perhaps the theory of "let them sue" actually works. The Registered Rep article is here, the award is at FINRA's website.

FINRA Proposes to Drop Industry Arbitrator Requirement

FINRA announced on Tuesday that it is going to propose a rule change which will permit investors in all cases filed with the agency to choose to have their claim decided by a panel of three public arbitrators. Currently, arbitration panels at FINRA are comprised of two public arbitrators and one arbitrator that has some connection to the financial industry.

Quite honestly, this is all much ado about nothing. There was a time when an industry arbitrator was beneficial to the process. However, during recent years, as FINRA changed the rules so appease investors, the definition of an industry arbitrator has become so expansive as to be meaningless in many cases. Clerks, runners, and secretaries who work at brokerage firms are considered industry arbitrators, and while they do a fine job, they do not offer any industry knowledge to the arbitration panel because of their industry "affiliation."

The entire concept of an industry arbitrator is a problem. First, it gives a perception of bias, even though there is no restriction on having a customer attorney on a panel. There is simply no reason to require an industry arbitrator. Put out the list, give everyone a choice, and if the parties and their counsel feel that an industry arbitrator would be helpful in a case, they will pick an arbitrator with that affiliation. Or not.

One interesting fact that comes out of the pilot program - 50% of the customers who were given the opportunity to have an all public panel still put an industry arbitrator on the panel.

I have handled hundreds of FINRA/NASD arbitrations. There is simply no benefit in requiring an industry arbitrator, and far too much controversy over the requirement. FINRA should have done away with the concept years ago.

The only problem is, who are investors going to blame when they lose an arbitration if they don't have the industry arbitrator to kick around?  More>>>

FINRA Wants More Details When Someone Gets Canned

FINRA's Regulatory Notice 10-39 is getting quite a bit of attention. FINRA is going to require Broker-Dealers to put more detail on termination notices in the future. The reason for the attention is that once again, we are going to have public disclosure of unsubstantiated allegations against brokers. Making matters worse, in NY at least, brokers cannot sue their firms for defamation, since those comments are absolutely privileged.
On Wall Street has more on the issue, with quotes from yours truly. More>>>

Judge Orders Law Firms to Assign Minorities and Women to Case

I have the utmost respect for Judge Baer, but this is a bit bizarre. According to Law.com, the Judge has ordered two plaintiff's class action law firms to "make every effort" to assign women and minority lawyers to the class action case. The rationale is that there are thousands of class members, male and female, from diverse backgrounds. According to the article, Judge Baer said that "it is therefore important to all concerned that there is evidence of diversity, in terms of race and gender, in the class counsel I appoint."

Just great. Federal judges are now making staffing decisions for law firms, based on race and gender. Interesting point is that he appointed the law firms two years ago as lead counsel.  More >>

Appellate Court Reinstates SEC vs. Cuban

The Fifth Circuit Court of Appeals reversed the District Court ruling which dismissed the SEC's complaint against Mark Cuban. We previously addressed the merits, or rather the apparent lack of merit, to the SEC's claims here.

However, the appellate court found that there were facts that were in dispute, an that the case should not have been dismissed. The case will proceed back in the District Court. More>>>