As I have noted in the past, and in my near daily telephone consultations with brokers with promissory note issues, this does not mean that the broker has no defense to the note. More appropriately, the "defense" is the counterclaim. The fact is, brokers don't simply up and leave their firms, and they do not do it on a whim. Changing firms is difficult, time-consuming, and a burden on clients. There is a disruption in the practice, and countless hours spent getting setup at the new firm and moving the clients.
Brokers leave because something is wrong, and depending on what is wrong there may be a viable counterclaim which can offset all or part of the promissory note obligation. I have represented brokers who successfully prosecuted claims against their firms in a number of instances.
One recuring theme is a broker who is hired with a specific book of business, and the firm later decides that it no longer wants that business - those claims have been successful in small and large note cases - in one case where I represented the broker, an arbitration panel cancelled a $750,000 note because of the counterclaim. In another a panel ordered brokers to pay back half of a $1.6 million note. In another, the panel ordered a forgiveness of 2/3's of a million dollar note.
Another issue which has been the basis of a successful counterclaijm are the failing of the firm's business, which impacts the broker. If the broker can no longer conduct business, the argument is that the broker must leave, and the loan, which was part of the consideration in the hiring, should not be enforced. We have been somewhat successful with those types of claims.
We have also obtained reductions of note obligations because of bad acts by the firm, typically in connection with a broker's termination and the marking of a U5 with false information.
Just this week an arbitration panel offset a 2.9 million dollar note by awarding the broker 1.7 million dollars on his counterclaim, cutting the amount due on the note in half. It was not a simple fight, and undoubtedly cost the broker time and money - there were multiple motions and briefs. The firm tried to split its claim, and the broker's counterclaim into two separate cases. The concept is that the firm will win its claim first, before the broker's counterclaim can be heard. The firm will then have an award, and if not paid in 30 days, FINRA will suspend the broker's license, forcing the broker to settle or dismiss his counterclaim.
This tactic has been attempted in some of my cases, but has never been successful. It was not successful here, and both claims were heard together, as they should be.
The arbitration had five different prehearing conferences, and the hearings themselves took 6 hearing days over 3 months. FINRA's forum fees were $21,000, of which the broker was ordered to pay $9,000. Then there are other costs, and attorneys fees.
The award does not address the details of the claims, but InvestmentNews reports that the broker had a successful practice at Smith Barney where he had been for 13 years, making loans to high net worth and private equity clients through Citigroup. After the Morgan Stanley takeover, his loans were moved to another part of the operation, costing him millions of dollars in revenue.
I see this far too often. While there is no doubt that a firm is entitled to drop business lines, or restructure, it also has the obligation to fairly treat its employees who are impacted by such business decisions. We saw the same disregard for the rights of the brokers in the Bank of America take over of Merrill Lynch, where business lines were changed, and merged and brokers lost millions of dollars in production - production that the firm took from the brokers by shifting the business to another business until. The firm keeps the production, the broker gets no credit for it, and the firm has destroyed the broker's business and keeps its profits.
Brokers should not simply assume there is nothing that can be done. A consultation with an experienced securities attorney is well worth the time. I conduct those consultations without charge and there is no harm in calling my office to see if we can help - 212-509-6544.
Broker claws back $1.2 million from Morgan Stanley in 'significant' promissory note case
