Wells Fargo Sues Over Transitional and Production Bonuses And Rep Fights Back

June 3, 2020

Wall Street is about nothing if not money. In today's featured dispute, we got a transitional bonus. We got production bonuses. We got promissory notes. We got a FINRA arbitration about Wells Fargo's efforts to collect $1.6 million in balances due. We got a federal court trying to figure out what was a bonus, what was a loan, and whether the arbitrators got the facts right. 

2019 FINRA Arbitration Decision

In a FINRA Arbitration Statement of Claim filed in August 2015, FINRA member firm Wells Fargo Advisors asserted breach of contract attendant to associated person Caputo's alleged non-payment of amounts due under a promissory note. Claimant Wells Fargo sought no less than $1,663,529.71 in compensatory damages, costs, and fees. In the Matter of the Arbitration Between Wells Fargo Advisors, LLC, Claimant, v. Christopher N. Caputo, Respondent (FINRA Arbitration Decision 15-02044 / July 25, 2019)
https://www.finra.org/sites/default/files/aao_documents/15-02044.pdf

Caputo generally denied the allegations, asserted various affirmative defenses, and filed a Counterclaim asserting breaches of contract and of the implied duty of good faith and fair dealing; unconscionability based on fraudulent inducement; unjust enrichment; defamation; fraudulent inducement to accept employment, expungement and New Jersey employment law breach..Counter-claimant Caputo sought no less than $1 million in compensatory damages, $5 million personal/reputational damages, punitive damages, costs, and fees. 

The FINRA Arbitration Panel found Respondent Caputo liable and ordered him to pay to Claimant Well Fargo $1,663,529.71 in compensatory damages plus interest. No rationale was provided for the Award.

Motion to Vacate: 2019 DNJ

On August 26, 2019, Caputo moved the United States District Court for the District of New Jersey ("DNJ") to vacate the FINRA Arbitration Award; and, thereafter, on December 2, 2019, Wells Fargo move to Confirm the Award. Christopher N. Caputo, Petitioner, v. Wells Fargo Advisors, LLC, Respondent (Opinion, DNJ, No.19-17204) 
http://brokeandbroker.com/PDF/CaputoOpDNJ200529.pdf
In setting out the relevant background of the dispute between the parties (which was not presented in any meaningful fashion in the FINRA Arbitration Decision), DNJ offered in part this: 

Pursuant to his contract, Wells Fargo Advisors agreed to provide Petitioner with a "Transitional Bonus" of $1,202,294.00, paid in installments of $12,883.50 once a month from 2011 to 2021. In addition, sometime during his tenure at Wells Fargo Advisors, Petitioner qualified to receive four separate "Production Bonuses" of $240,459.00, because his "total gross production" exceeded specific benchmarks set forth in his contract. Like the transitional bonus, the production bonuses were paid in installments, once a month over the course of a specified period. 

Petitioner elected to execute five separate loan agreements (the "Notes") that allowed him to receive each bonus upfront, in a lump sum amount. Under their terms, Petitioner agreed to reimburse Wells Fargo Advisors for the Notes, which each set forth a schedule of debt obligations; the debt obligations were matched each month by the transitional and production bonus installments that Petitioner received. The Notes also contained acceleration provisions triggered upon an event of default, including termination. In such instances, Wells Fargo Advisors was entitled under the Notes to "declare the entire principal balance of [each] Note immediately due and payable." 

During Petitioner's tenure at the firm, Wells Fargo Advisors conducted an internal investigation into Petitioner's business practices, which resulted in his discharge on December 2014. Thereafter, on August 4, 2015, Wells Fargo Advisors commenced an arbitration proceeding against Petitioner with FINRA, in order to recoup the outstanding principal owed on the Notes, along with interest, costs, and fees. Petitioner counter-claimed against Wells Fargo Advisors, alleging numerous causes of action, including: breach of contract, unconscionability based on fraudulent inducement, unjust enrichment, breach of the implied duty of good faith and fair dealing, defamation, fraudulent inducement to accept employment, expungement, and employment law breach. 

In resolving the parties' dispute, a FINRA arbitration panel of three members (the "Panel") held over 22 separate hearings that spanned from December 10, 2018 to June 21, 2019, during the course of which more than 13 witnesses testified. . . .

At pages 2 - 3 of the DNJ Opinion

SIDE BAR: Omigod -- could Wells Fargo have conjured up a more complex and absurd bonus scheme? Let's make sure that we're all the same page with what's what.

The DNJ Opinion states alleges that Wells Fargo paid to Caputo a $1,202,294.00 "Transitional Bonus,"  which was to be paid in monthly installments of $12,883.50 from 2011 to 2021. Okay, let's have some fun with math. Multiply $12,883.50 times 12. That should give you $154,602 per annum. Now . . . go ahead . . . explain to me how the monthly installment works out to $1,202,294 if paid for the ten years from 2011 to 2021. Let's see $154,602 times 10 equals $1,546,020 -- so that's wrong. Let's try it in reverse: $1,202,294 divided by 10 equals $120,229.40 and dividing that by 12 would give us a monthly installment of $10,019.12 -- so that's wrong too. I'm wondering if the Court bothered to check the math! If there's some other explanation for the mathematical discrepancy, it sure as hell isn't explained in the Opinion.

In addition to the somewhat incalculable "Transitional Bonus," Caputo also earned four separate "Production Bonuses" of $240,459.00, which we're told were paid monthly over what is only characterized as a "specific period of time." Gee, that's nice that payments were made over some specific period of time -- I mean, you know, like who the hell wants to get paid over a non-specific period of time, right? 

Now things get a bit more fuzzy. The DNJ Opinion states that Caputo "elected to execute five separate loan agreements (the "Notes") that allowed him to receive each bonus upfront, in a lump sum amount." As best I can infer from the fact pattern, that would be one Note for the ten-year transitional bonus and four Notes (one each) for the four production bonuses. If you have a better idea how to make all those bonuses fit into five Notes, I'm all ears. 

So waddawegot here? Frankly, a mess and, even more to the point: A mess that always seems the careful result of a cynical desire by Wall Street's larger firms to complicate these "bonus" transactions so that they look like a bonus but then, on second viewing, they magically transform into a "loan." When push comes to shove, it all seems a calculated bit of legerdemain designed to bind the financial professional to the firm. Yes, quite often both parties are happy with this messy arrangement until, well, you know, until they're not. On the other hand, many consumer advocates detest these bonus/loan arrangements because the negative financial consequence of refusing to sell a toxic product may arise if the financial professionals chooses to quit rather than do something in violation of fiduciary principles or a customer's best interest. Wall Street has cleverly created a compensation package whereby quitting will trigger a repayment obligation per an acceleration provision. Again, that's not an atypical arrangement but it does raise some ethical issues when the consequence of doing the right thing may be analyzed by a financial professional as not being the right thing to do.


In furtherance of his Motion to Vacate, Petitioner Caputo argued that the FINRA Award (1) conflicts with certain public policies; and (2) was rendered in manifest disregard of the law. DNJ denied Petitioner Caputo's Motion to Vacate and granted Petitioner Wells Fargo's Motion to Confirm based upon a finding that Caputo failed to demonstrate that the dispute at issue pertained to a "well defined and dominant "public policy requiring vacatur or that the FINRA Panel had acted in manifest disregard of the law. 

Public Policy Considerations

Caputo attempted to portray his promissory notes (known in industry parlance as "employee forgivable loans" or "EFLs") as earned bonuses. As to how he would explain the installment nature of the loans as bonuses, Caputo allegedly offered this analysis:

[U]nder the terms of his contract, Petitioner maintains that he received bonus installments that offset his obligations under the loans each month, contingent upon his continued tenure with Wells Fargo Advisors. Id. However, in the event of his resignation or discharge from Wells Fargo Advisors, Petitioner argues that an unenforceable contractual forfeiture provision stated that he would "forfeit . . . unpaid installments . . . due under [h]is [b]onus[es]." Id. At that same time, according to Petitioner, the outstanding balance under all of his loans "become due in full out of pocket." Id. Citing various labor laws, Petitioner argues that the contract's forfeiture provision, in essence, deprived him of "wages" that he "earned," based on his performance at Wells Fargo Advisors. Moreover, according to Petitioner, Wells Fargo Advisors prevented him from working off his loan "obligation[s]," because he was discharged without cause.

At pages 8 - 9 of the DNJ Opinion

DNJ makes it clear from the start of its analysis that "the instant dispute does not implicate notions of public policy or public harm." That's as quick and blunt a determination that a court will make. In contrast to any public policy issue, the Court characterized Caputo's argument as describing;

nothing more than a knowing and willing private contractual relationship between himself and Wells Fargo Advisors. Thus, because the parties' dispute, here, is contractual in nature, Petitioner cannot seek to vacate the Award unless he demonstrates that the "arbitrators exceeded their powers" under § 10(a)(4) of the FAA, based on their decision to enforce the Notes as independent and valid loan agreements. . . .

At page 11 of the DNJ Opinion

As it progresses with its analysis, DNJ offers these further findings [Ed: footnotes omitted]:

Here, it is undisputed that Petitioner was eligible to receive five separate bonuses during his tenure at Wells Fargo Advisors, including one "transitional" and four "production" bonuses. Pursuant to the terms of his employment contract, the bonuses were structured such that Petitioner would acquire them over time, paid once a month in separate installments during the course of a specified period. However, because Petitioner elected to receive the future bonus installments upfront in an immediate lump sum, he executed five separate Notes in amounts equaling each of his bonuses. Notwithstanding the five separate Notes that the parties executed, Wells Fargo Advisors continued to provide Petitioner with transitional and production bonus installments each month, which "offset" Petitioner's monthly debt obligations under the Notes. 

Petitioner argues that the Notes do not constitute bona fide loan agreements. Citing out-of-district bankruptcy court cases, Petitioner contends that "[e]ach note should . . . be considered together with the bonus agreement on which the note is predicated." Petr.'s Opp., at 17. Construing these documents in tandem, according to Petitioner, "the supposed loans were not intended . . . to be repaid, but instead . . . forgiven over the course of the 'borrowers' continued employment." Petr.'s Opp., at 18. In support, Petitioner emphasizes that his bonus installments were paid each month, in amounts that matched the obligations which came due under the Notes. Petr.'s Opp., at 9. The "economic effect" of these transactions, Petitioner avers, equates to a "periodic and scheduled forgiveness of [his] outstanding debt." Petr.'s Opp., at 17. Thus, Petitioner contends that the Panel erred in enforcing the Notes and entering an Award against him.

At pages 12 - 13 of the DNJ Opinion

Manifest Error of Law

As to Caputo's second-prong of appeal, he argued that:

Wells Fargo Advisors encouraged the Panel to resolve the parties' dispute based on "industry practice," instead of the applicable law. Petr.'s Opp., at 33. During the hearings, Petitioner also maintains that Wells Fargo Advisors "emphasized that it could discharge [Petitioner] at will," and claimed that a reviewing court was "not entitled to . . . substitute its judgment for that of the arbitral panel, no matter how wrong it may believe the panel's decision to be." Id. Citing Montes v. Shearson Lehman Bros., 128 F.3d 1456, 1464 (11th Cir. 1997), Petitioner contends that the representations that Wells Fargo Advisors advanced during the proceedings, in conjunction with the Award which it received, "raise[] an inference that the law was ignored." . . .  

At page 15 of the DNJ Opinion

DNJ declined Caputo's invitation to find that the FINRA Panel acted inappropriately. The Court found that the arbitrators were not encouraged nor directed to disregard the law -- notably because the deliberations seemed derived from the terms and provisions of the Notes and the underlying contract of employment. 


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