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How Wirehouses Turn the Tables on Ex-Employees in Finra Arbitrations

By Miriam Rozen June 5, 2018

Two years ago, a Pooler, Ga. financial advisor with 11 years of experience filed a complaint with Finra against his employer at the time: Wells Fargo Advisors. The advisor sought $2.6 million in compensatory damages and $750,000 in punitive damages. He based his claims on allegations that Wells Fargo had failed to abide by Finra rule 2010 – "standards of commercial honor and principles of trade."

But in April that advisor-initiated dispute led to Wells Fargo asking a federal court to order the advisor pay $292,723 with possible additional attorney fees — the amount a Finra-supervised arbitration panel had awarded to the wirehouse.

How did the turnabout take place? It happened because of a scenario that plays out reliably and frequently at Finra hearings, according to lawyers representing advisors in disputes in that forum.

After the advisor resigned from Wells Fargo in August 2017, the wirehouse, which had previously denied the advisor’s allegations, filed a counterclaim with Finra. In it Wells Fargo alleged the advisor, who had worked at the wirehouse for two years and previously at Edward Jones for eight years, had breached his contract and had to repay a promissory note he had executed.

At a Finra–supervised arbitration hearing in Atlanta, held over three days in October 2017, the advisor represented himself and had no lawyer. Wells Fargo was represented by two lawyers — Sara Soto and Joelle A. Simms from the Fort Lauderdale, Fla. law firm Bressler, Amery & Ross. In November 2017, a Finra-supervised panel of three arbitrators ruled to deny the advisor’s claims “in their entirety,” holding him liable to pay the promissory note with interest accruing from the day he left Wells Fargo.

In late April, Wells Fargo filed a petition in federal court asking a judge to order the advisor to pay the Finra award and possibly additional attorney fees.

The advisor could not be reached for comment and is no longer a registered broker/dealer representative. A Wells Fargo spokeswoman emailed that her company would “defer to the public filings for comment.”

The case highlights how precarious going before a Finra-supervised panel of arbitrators can be for advisors, particularly if they go without counsel and with promissory note obligations to their employer. Yet advisors who want to allege wrongdoing against a wirehouse usually have little choice but to pursue such claims through Finra, since their employment agreements often have mandatory arbitration clauses in them.

“It’s a horrible forum. I would have thought it would have gotten better and it's gotten worse in the 20 years that I’ve been practicing,” said Linda Friedman of Stowell & Friedman, who represents advisors at Finra-supervised arbitration hearings and also has sued wirehouses in federal court, winning more than $300 million in class action settlements from them for former employees.

“You hear a lot horror stories,” says Robert L. Herskovits of the Herskovits PLLC Law Firm in New York, who represents both advisors and employers at Finra proceedings.

Although Friedman, Herskovits, and even a lawyer who exclusively represents wirehouses all view Finra-supervised arbitrations as imperfect, recently a growing percentage of advisors have turned to seek redress through Finra-supervised arbitrations.

According to Finra statistics, the number of intra-industry claims filed with Finra — a category that captures cases when advisors seek redress for allegations against their employers — has grown significantly in 2018. Specifically, 58% more such cases have been filed so far in 2018 than had been during the same time period in the prior year. Finra doesn’t provide a statistical breakdown how many of those cases are filed by advisors versus firm, firm versus advisor, or firm versus firm, according to Michelle Ong, a Finra spokeswoman. But Finra does provide a tally of the number of claims filed in intra-industry disputes related to promissory notes; that figure reached 72 in the first five months of 2018, almost as many as the 78 filed in the entire previous year.

Some of the recent bump in the total number of intra-industry claims is likely due to advisors seeking to expunge customer allegations from the Central Registration Depository (CRD), according to Ong and lawyers representing advisors. There has been a rush to file such requests prior to the expectation that Finra will institute a proposed change to the expungement process, Ong says.

The vast majority of advisors with employer disputes will end up disappointed at Finra-supervised hearings, according to Friedman.

“If you think about setting up your own justice system and then picking people from the industry to serve as judges, how could it not work in the employer's favor?” she says.

Because there are usually no witnesses and often no evidence, Friedman warns young attorneys at her firm never to consider what unfolds at a Finra hearing as the practice of law.

“We call it a game show,” she says. Finra arbitrators are mostly individuals with previous ties to wirehouse management, Friedman said. In a follow up email sent after this story was first published, Finra spokesperson Ong wrote that two out of three panelists by a rule revised in 2015 have no ties to the industry. They are not paid well, they are often elderly, and, not infrequently, they are also incompetent, Friedman claims. “They go from bad to worse,” Friedman says about panel members.

At one recent hearing during which Friedman represented an advisor, an arbitration panel member was blind and so could not read any of the documents her client had brought as evidence. The panel member also slept through much of the hearing, Friedman says. At another hearing, a panel member told Friedman, “We don’t have to follow the law.”

The hearings typically are scheduled in hotel rooms with no public access. There are no audio or videotapes made -- only a transcript of the hearing, which Finra does not make available to the public. however, Finra spokesperson Ong says in an email: "There is a digital or audio recording of every hearing unless the parties request a transcript instead."

If panel members withdraw from a hearing early, their replacements don’t bother to rehear the whole case, but nevertheless participate fully in the ruling process as if they had, Friedman insists. Ong says: "Finra staff ensures that a replacement arbitrator listens to the audio and reads the record with exhibits for sessions already held."

John Kincade, a shareholder at the law firm Winstead PC in Dallas, who typically represents employers at Finra hearings, doesn’t share such a negative view of Finra arbitrations as Friedman. But he nonetheless agrees advisors who have outstanding promissory notes shouldn’t expect to get relief from them at a Finra-supervised hearing.

“The chances of winning those cases are no better for the advisor in Finra than they are at the courthouse. There is only a narrow band of enforceable defenses that would excuse your obligation for paying that money. You received this money. You spent it. You did whatever you wanted to do with it. I think the best thing that an advisor can do is cooperate with their former firm,” Kincade says.

For the past decade, Finra has expedited the administration of cases that “solely involve a brokerage firm’s claim that an associated person failed to pay money owed on a promissory note,” as it states on its website. Under Finra’s expedited procedures, a single public arbitrator decides cases that are exclusively about promissory notes. A full panel of three arbitrators hears such claims if they are paired with an advisor’s additional allegations — as they were with the former Wells Fargo advisor from Pooler, Ga.

Typically, advisors commit to the promissory note obligations when they receive a signing bonus structured as a no-interest loan. At the same time as the loan, they typically receive a schedule of future bonuses that will eventually cover their note obligation. If they resign or are terminated before they receive all the scheduled bonuses to cover the note, they typically owe the remaining amount due. Even if the employer forgives the debt, the advisors will owe taxes on that lump sum.

Advisors have to take some responsibility for such risks, Herskovits argues. “The FA got the money. Sometimes that seems to be lost in the shuffle,” he says.

Yet he too agrees advisors are most often better off not going to Finra with claims to extricate themselves from note obligations, even when they have other claims. “Anecdotally, it's in the neighborhood of 90% of the time they have to pay it,” Herskovits says about advisors trying to get a Finra panel to rule that they don’t have to repay their employer on a promissory note.

The advisors who have strong claims, he notes, most likely settle and never get before a Finra panel. “The FA who has a legitimate gripe with a promissory note, those are rarely aired in an arbitration. Good claims almost never make it to a hearing,” he says.

But Friedman views the promissory notes and mandatory Finra arbitrations as setting a trap to stop advisors from filing justified claims against their employers.

“It’s real 'gotcha' moment,” Friedman says about advisors resigning or quitting with outstanding promissory note obligations. The advisors are suddenly faced with the prospect of paying a large lump sum or fighting to be absolved through Finra, often eventually getting a court judgment against them for failing to pay. That court judgment must be disclosed to Finra within 30 days and the information will become available for clients and prospective clients to see on BrokerCheck. Often employers will offer terminated advisors a settlement allowing them to pay back the note over time. But employers typically will insist that as part of such deals, the advisors agree to waive all other claims against the wirehouse, Friedman says.

During his Finra proceeding, the Pooler, Ga. former Wells Fargo advisor won one small break. In its Finra-filed counterclaim, Wells Fargo initially requested the advisor pay back the $292,723 with 4.9% in interest from the day he quit the wirehouse.

At the close of the Finra hearing, Wells Fargo modified that request, reducing the interest rate to 3.9%. In its ruling, the Finra panel of arbitrators applied the lower rate to calculate the amount the advisor owed Wells Fargo. But the same panel also assessed that the advisor had to pay half of the arbitration hearing session fees — another $4,900.