April 30, 2013
It's as bedrock and basic a circumstance as there is. A customer complains to the brokerage firm about some perceived misconduct by a stockbroker. The stockbroker is outraged at the allegations and denies, denies, denies. At some point, the brokerage firm pulls out a calculator and asks whether it makes business sense to fight the allegations or to simply write it off as the cost of doing business.
All of which brings us to the threshold of yet another bedrock, basic Wall Street dispute. What happens when a brokerage firm settles with customers and/or regulators from a sense of expediency or convenience (or from a conviction that the stockbroker is guilty as sin) but the stockbroker refuses to go along and won't contribute to any financial settlement?
Let's consider a variation on that garden variety theme of a brokerage firm paying out the settlement bucks but the stockbroker refusing to indemnify or contribute.
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in April 2012, Claimant Raymond James Financial Services attempted to recover settlement dollars that it had paid in response to complaints made by Respondent Westerman's customers. Claimant Raymond James cited to its indemnification rights under the terms of an Indemnification Clause contained in the Independent Sales Associate Agreement entered into with Respondent Westerman on May 19, 1998. Claimant sought $121,881.53 in compensatory damages, costs, and fees. In the Matter of the FINRA Arbitration Between Raymond James Financial Services, Inc., Claimant, vs. Richard Herbert Westerman, Respondent (FINRA Arbitration 12-01324, April 26, 2013 .)
Respondent Westerman generally denied the allegations.
Although not set forth in the FINRA Arbitration Decision, online FINRA records as of May 2, 2013, disclose the following about this arbitration:
Allegations: RAYMOND JAMES FINANCIAL SERVICES, INC. IS SEEKING TO RECOUP THE COSTS AND EXPENSES INCURRED AS A RESULT OF SIX COMPLAINTS AND STATE FINES AND COSTS FROM THE STATE OF MONTANA.
. . .
Summary: MR. WESTERMAN VEHEMENTLY DISAGREES WITH THE CLAIM AGAINST HIM. SETTLEMENT OF THESE CLAIMS HAS ALREADY TAKEN PLACE. FINES SANCTIONS HAVE BEEN LEVIED BY THE SRO AND THE STATE OF MONTANA. MR. WESTERMAN BELIEVES THAT THE CURRENT ACTION AGAINST HIM IS UNREASONABLE.
The FINRA Arbitration Panel found Respondent Westerman liable and ordered him to pay to Claimant Raymond Jame $76,028.42 in compensatory damages.
Bill Singer's Comment
The bulk of these indemnification/contribution cases rarely wind up as published FINRA Arbitration decisions because they typically settle or die a tortured in-house death.
For many registered persons it may well make career sense to offer some contribution to an employer broker-dealer -- for one thing, it certainly avoids washing all the dirty laundry in public (as gets done in articles such as this); and, for another thing, failing to offer some off-set when asked by your employer may soon turn you into a "former" employee. As such, right or wrong, many RRs write out checks as the cost of doing business and to keep peace at work.
Similarly, some brokerage firms recognize that going after employees who have refused to settle or voluntarily contribute to settlements present headaches. Many states do not permit employers to simply deduct indemnification/contribution payments from their employees' salaries or commissions absent a written agreement to that effect. Further, when the brokerage firm does the math of
the compelling solution may simply be to negotiate a settlement notwithstanding that the individual broker has presented facts that indicate a lack of liability. Under such a scenario, many firms may not ask the broker to chip in -- and if the firm does ask and the answer is "no," that may well be the end of discussion.
- how much will it take to settle,
- what's it gonna cost to hire a lawyer to defend,
- what's the risk of attracting a regulatory investigation, and
- retaining the customer,