It is my distinct pleasure to present to you an analysis of a recent FINRA intra-industry arbitration involving a dispute over a promissory note. The case at issue seems to have been a bloody affair involving a $1.38 million balance on a promissory note. The back-and-forth allegations suggest that the combatants went at it bare-knuckled and without any desire to have a bell save a battered opponent. One and only one party was walking out of this ring under his own power. Unlike many similar arbitration decisions from FINRA, this one is superbly crafted by the arbitrators and offers us a substantive fact pattern and helpful rationale. We understand what was involved, what was at issue, and why the award was rendered. Truly, we can't ask for more than that.
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in May 2014, Claimant Barclays sought to recover the principal on a promissory noted executed around October 9, 2010, by Respondent Webb. At the close of the FINRA Arbitration hearing, Barclays requested:
In the Matter of the FINRA Arbitration Between Barclays Capital Inc., Claimant/Counter-Respondent, vs. Watt Wetmore Webb, Respondent/Counter-Claimant (FINRA Arbitration 14-01677, December 14, 2015).
Webb generally denied the allegations, asserted various affirmative defenses, and filed a Counterclaim alleging, among other causes, wrongful termination and retaliation. Additionally, Webb sought the revision of his Form U5 to indicate that he had been "terminated without cause." In his Counterclaim, Webb sought two orders:
[W]ebb is a sophisticated portfolio manager with degrees from Cornell, Johns Hopkins, and Harvard Universities. From 2007 to 2012 he was a senior director of portfolio management at the bank BNY Mellon ("Mellon") where he managed in excess of $400 million worth of assets for high net worth individuals and families. Webb managed his clients' portfolios according to a proprietary strategy he devised and labeled Yield Focused Equities ("YFE").
In early 2012 Webb was contacted by a head hunter who enticed him to consider moving himself and his rich client base to Barclays, a registered Broker Dealer. During the initial courting period Webb declined Barclays' overtures and remained at Mellon for reasons not here relevant. Ultimately, however, Webb made the move.
During the roughly 7 months between the time Webb was introduced to Barclays and the time he started there, the testimony revealed that he conducted extensive due diligence before deciding to make the move. In the time leading up to that move, Webb, with the assistance of counsel, negotiated with Barclays over a number of matters that were incorporated into his offer letter, which ultimately became his contract of employment. On the other hand, a number of Webb's proposals for modifications to that agreement were rejected. Coupled with Webb's employment agreement was a standard industry forgivable loan in the amount of $1,607,500.00, which Webb also negotiated, that would be fully repaid by Barclays if Webb remained employed for at least 7 years.
During the course of Webb's due diligence over Barclays, he claims to have secured a number of verbal promises that now form a substantial part of his claim that he should be relieved of any obligation to repay the promissory note he signed. Those alleged promises were that: (1) he would always have 2 sales assistants; (2) Barclays would always offer mortgages, and other types of loans, to his high net worth clients; (3) Barclays would never try to take his clients; and (4) he could run his YFE strategy at Barclays the same way he did at Mellon. However, while Webb was able to secure some modifications of Barclays' standard form offer letter, such as a carve out acknowledging that his YFE strategy was proprietary to him, he either did not try or was rebuffed in securing a written acknowledgement of the promises that were allegedly made to him above. 1
After all of the operative documents were signed and Webb received his forgivable loan, he moved over to Barclays where he set up his YFE portfolio management program. In doing so he was required to set investment guidelines that had to be approved by Barclays' Investment Advisory Committee ("lAC"). Those guidelines, which Webb set and were approved by Barclays, set, among other things, concentration limits and the types of securities that could be purchased within a YFE managed portfolio.
Webb started at Barclays in approximately October 2012 and his first clients got up and running in about February 2013. However, there were problems from the very outset because it turned out that Webb managed his clients' accounts on a "relationship basis" as opposed to an "account by account" basis. In other words, with clients who had multiple accounts, including for different members within a family, Webb believed that the guidelines he set should apply over the broad relationship, as opposed to a per account basis. However, Barclays monitored, and was indeed required to monitor, Webb's accounts on a stand-alone basis to ensure each account conformed to the guidelines Webb set. Thus, Webb continuously received warnings from Barclays' compliance department advising that his accounts were in violation of his designated portfolio parameters.
Rather than attempting to work within Barclays' standard policies and procedures he agreed to abide by, Webb was rude and derisive in his communications with compliance personnel and his manager. Webb claimed that Barclays' practice of monitoring for portfolio compliance on a per account versus relationship basis harmed "the client" because, for example, a client could be forced to divest a security in a taxable account and pay unnecessary taxes in order to bring the account into "compliance."
Webb claims that his complaint in this vein supports the assertion that Barclays "retaliated" against him when he was ultimately fired on April 1, 2014. However, Webb's argument that his complaint was a subjectively or objectively reasonable refusal to participate in an activity that would violate a state or federal statute, or a violation of or noncompliance with a local, state or federal rule or regulation in violation of Labor Code Section 1102.5 is unsupported. On the contrary, Barclays owes a fiduciary duty to its customers and must know and understand the client's needs and goals. Applying portfolio guidelines over a broad relationship with multiple accounts, especially when the account holders are different individual members of a family, as was the case here, ignores those individuals' separate needs and may create serious conflicts of interest exposing not only Barclays, but Webb, to customer complaints for breach of fiduciary duty, negligence, unsuitability due to over concentration, and violation of FINRA Rule 2111 (know your customer).
However, Barclays offered Webb numerous solutions to avoid the perceived harm, but he refused to go along, most often ignoring Barclays' proffers or responding in a rude or derisive manner with comments like, "This is asinine." Indeed, Webb was evasive, combative and flippant in his responses to serious questions from the Panel on this subject-responding in one instance when asked about whether he understood a particular solution to this dilemma offered by Barclays' compliance personnel, that the proposal was like a "letter from the DMV."
Webb was warned numerous times in writing about his refusal to follow Barclays's policies and procedures, and was similarly warned about the manner in which he communicated with the compliance department and management. All of this brewing dissatisfaction and insoluble conflict between Barclays and Webb came to a head on March 25, 2014 when Webb's manager told him in a phone conversation that one of his sales assistants was being reassigned, and would not be replaced. Webb's response is better not printed, but needless to say it was the proverbial straw that broke the camel's back, and Webb was fired on April 1, 2014. Webb disputes that he said what his manager claimed but the Panel finds Webb's testimony on key points, including this one, not believable.2 For largely the same reason, the Panel rejects the other element of Webb's retaliation claim that his asserted complaints about Barclays' internal customer performance reports (AXYS reports) being false or fraudulent contributed to Barclays' decision to terminate him. The evidence convincingly showed Webb was terminated because of his failure to follow internal Barclays policies and procedures and the manner in which he interacted with his colleagues and management.
In fact, after Webb was fired and in search of other employment, he was untruthful with not only a search firm but also one prospective employer about his separation from Barclays, claiming at one point after he was fired that he was still employed there but looking to leave. In addition, at roughly the same time Webb came to work for Barclays in October 2012, he had applied to become a resident of New Zealand for himself and his family. His application was approved on February 21, 2013 on condition that he spend a certain number of days in country beginning in 2014-during the same time he was supposed to be working full-time for Barclays for at least 7 years until his promissory note was fully forgiven.
1 While it appears Barclays verbally agreed to this 4'" promise, the evidence proved it was too vague for there to have been a true meeting of the minds over what this meant precisely. This is in addition to the fact that this promise sguarely contradicts express provisions of the offer letter Webb signed binding him to follow Barclays' standard policies and procedures which, as will be explained later, were in conflict with how Webb did business at Mellon.
2 The evidence was persuasive that Webb fabricated notes of asserted conversations after the fact. Indeed, he even edited his medical records and caused them to be produced to Barclays as if they were the authentic records of his physician treating him for emotional distress issues following his termination. These "notes" formed the basis of his complaint that Barclays made a number of false promises to him that were flatly contradicted by the parties' final fully integrated employment agreement and promissory note that Webb, himself, participated in negotiating.
FINRA Panel Award
The FINRA Arbitration Panel found Respondent Webb liable and ordered him to pay to Claimant Barclays:
Rather than attempting to work within Barclays' standard policies and procedures he agreed to abide by, Webb was rude and derisive in his communications with compliance personnel and his manager.