Take a look at any number of Wall Street compensation packages and you will be confronted with a breath-taking array of up-front, back-end, and deferred compensation, often coupled with forgivable loans, promissory note, and/or bonuses. This array of compensation tools often comes attached to an intricate web of contracts, agreements, letters, and understandings. All of which sets the stage for some truly nasty and epic break-ups between employees and employers, particularly when the terms in one document contradict the terms in another. Read this recent case of one such employment honeymoon that went awry and the parties found themselves in court where they may, or may not, belong.
Case In Point
From April to November 2012, Kevin J. Gordon was a broker on BGC Financial L.P.'s ("BGCF's") Asset Backed Swaps Desk. Before starting that job, Gordon had signed a "Cash Advance Distribution Agreement and Promissory Note" dated August 1, 2011, which provided that he would borrow $700,000 from BGCF-affiliate BGC Notes. On August 1, 2011, Gordon also entered into a five-year Employment Agreement with BGCF. Accordingly, on April 30, 2012, BGC Notes loaned $700,000 to Gordon.
The Non-FINRA Member Affiliate
BGCF is a member firm of the Financial Industry Regulatory Authority ("FINRA") but BGC Notes is not. That scenario isn't too uncommon on Wall Street. Notably, many brokerage firms -- particularly larger ones - have resorted to issuing so-called Employee Forgivable Loans ("EFLs") and various promissory notes through a non-FINRA member firm affiliate. There are many reasons for using a non-FINRA-member-firm affiliate, but among the most prominent considerations is to try to place certain aspects of the loan transaction outside the purview and jurisdiction of FINRA arbitration. In theory, a non-FINRA entity may resolve disputes in the courts rather than before a FINRA arbitration panel.
SIDE BAR: On Page 15 of the Uniform Application for Securities Industry Registration or Transfer ("Form U4"), you will find 10 small-print paragraphs of which this is one:
Section 15A: INDIVIDUAL/APPLICANT'S ACKNOWLEDGEMENT AND CONSENT:
Also, were you aware of this self-regulatory organization rule:
5. I agree to arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer, or any other person, that is required to be arbitrated under the rules, constitutions, or by-laws of the SROs indicated in Section 4 (SRO REGISTRATION) as may be amended from time to time and that any arbitration award rendered against me may be entered as a judgment in any court of competent jurisdiction.
FINRA Rule 13200. Required Arbitration(a) GenerallyExcept as otherwise provided in the Code, a dispute must be arbitrated under the Code if the dispute arises out of the business activities of a member or an associated person and is between or among:
- Members and Associated Persons; or
- Associated Persons.(b) Insurance ActivitiesDisputes arising out of the insurance business activities of a member that is also an insurance company are not required to be arbitrated under the Code.
To The Courthouse
Suffice it to say that things apparently didn't work out between employee Gordon and employer BGCF because he resigned from the firm on November 9, 2012. You can read the details on the attached Decision and Order.
In response to Gordon's resignation, BGC Notes marched into New York State Supreme Court and made a motion for summary judgment in lieu of a complaint, seeking to recover $699,652.58 plus interest. BGC Notes, LLC,, Plaintiff, v. Kevin J. Gordon, Defendant (Decision and Order, NYS Supreme Court, 651808/14, July 13, 2015).
Not So Fast
In reaction to BGC Notes' dash to the courthouse, Gordon moved the court for an an order staying the NYS Supreme Court action and an order compelling arbitration. Among the arguments Gordon advanced in support of his motions was that BGC Notes was bound by the mandatory intra-industry arbitration provisions in his Employment Agreement, FINRA's Code, and Form U4.
Not A Party
BGC Notes countered by noting that it was not a party to Gordon's Employment Agreement with BGCF and, further, the Note specifically set jurisdiction with the New York State courts for the purpose of resolution of disputes.
SIDE BAR: Wow, now that's a puzzle!
BGC Notes goes to court and points to the documents to which it is a party in support of its choice of the New York State Supreme Court as the only appropriate forum to adjudicate its demand for payment of Gordon's Note. More to the point, BGC Notes isn't a FINRA member firm and is not subject to that organization's rules -- and BGC Notes did not sign or submit any Form U4.
Gordon points to documents that he had signed with BGCF that provide for the arbitration of disputes before a FINRA arbitration panel. Additionally, he explains that FINRA's Rules required both parties to arbitrate such disputes -- and, one last thing, he is obligated to arbitrate this dispute under the terms of his Form U4.
How should the Court resolve this court-versus-arbitration issue? On the one hand, in favor of BGC Notes because its loan was made subject to jurisdiction of disputes with New York state courts; or, on the other hand, in favor of Gordon because he is subject to mandatory intra-industry arbitration of disputes?
NYS Supreme Court Decision and Order
In denying BGC Notes' motion for Summary Judgment and granting Gordon's motions to to stay the NYS Supreme Court action and to compel arbitration, the Court offered, in part, this rationale:
Under the principles of estoppel, a nonsignatory may be compelled to arbitrate where he or she "knowingly exploits the benefits of an agreement containing an arbitration clause, and receives benefits flowing directly from the agreement." Matter of Belzberg, 21 N.Y. 3d at 631 (internal quotations omitted). In determining whether a nonsignatory receives a direct benefit, "[t]he guiding principle is whether the benefit gained by the nonsignatory is one that can be traced directly to the agreement containing an arbitration clause." Id. At 633
Here, I find that BGC Notes should be compelled to arbitrate because it receives direct benefits flowing from the Employment Agreement, which contains an arbitration clause. In setting forth Gordon's compensation, the Employment Agreement provided that Gordon would receive a $700,000 loan from BGC Notes, in addition to salary and commissions. The Note expressly stated that BGC Financial would cause BGC Notes to make the $700,000 loan "[i]n consideration for services performed . . . and as consideration for Employee's consent to enter this Agreement." Based on this provision, BGC Notes clearly received a direct benefit from the Employment Agreement as it obtained the right to make the loan to Gordon under this agreement.
Page 6 -7 of the Decision and Order
Bill Singer's Comment
As readers of the BrokeAndBroker.com Blog know, I have often chastised FINRA for what I view as its hypocrisy when it comes to charging individual registered representatives with certain violations of:
FINRA Rule 2010. Standards of Commercial Honor and Principles of Trade
A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.
In keeping with the terms of Rule 2010, how does it comport with 'high standards of commercial honor and just and equitable principles of trade" when FINRA's member firms structure various EFL and promissory note transactions through an affiliate that is not a FINRA member firm? Given that the main -- perhaps only -- motivation behind the resort to the non-member-affiliate is to provide a purported "good faith" basis upon which to run to the courthouse to enforce the subject loan rather than be obliged to proceed to mandatory intra-industry arbitration, why hasn't FINRA issued a Notice to Members or an interpretation that would prohibit this practice? If a court has no problem tracing the pathway of a direct benefit from the non-member affiliate to the member affiliate's agreement with a subject employee, why has this same exercise proven so daunting to the industry's self-regulatory organization?
Ultimately, this whole affiliate-note-issuer nonsense takes on the tawdry appearance of a gambit seeking to impose upon a former employee the additional delays and costs of appearing in court for the purpose of stopping court proceedings and obtaining a remand to the appropriate FINRA arbitration forum. Does that strike anyone as compatible with FINRA's lofty "high standards of commercial honor and just and equitable principles of trade?" And before you're too quick to cross swords with me, remember that an independent state court ruled "BGC Notes should be compelled to arbitrate because it receives direct benefits flowing from the Employment Agreement, which contains an arbitration clause." Those are not my words.
Many thanks to my former law partner Aegis Frumento, Esq. of the law firm of Stern, Tannenbaum & Bell (counsel to Gordon) for alerting me to this case.