Arbitrators Say Deutsche Bank Securities Managing Director's Conduct Was Reprehensible

December 30, 2011

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in April 2010, Claimant Colavito asserted

  • breach of employment agreement;
  • fraud and constructive fraud; and
  • negligent misrepresentation

in connection with his employment with Respondent Deutsche Bank Securities, Inc. Claimant sought $4.8 Million in compensatory damages, punitive damages, interest, attorneys' fee, and costs. In the Matter of the FINRA Arbitration Between Stephen Colavito, Claimantvs. Deutsche Bank Securities, Inc.,Respondent (FINRA Arbitration 10-01557, December 27, 2011). 

Respondent Deutsche Bank generally denied the allegations; asserted various affirmative defenses; and filed a Counterclaim for breach of promissory note. In its Counterclaim, Deutsche Bank alleged that upon his termination, Colavito failed to repay the balance due on a June 24, 2008, promissory note (the "Note").  Respondent sought $854,492.70 in compensatory damages,  interest, costs and expenses, and  attorneys' fees.

A Moving Experience

Respondent filed a:

  • Motion to Preclude the Introduction of Testimony or Evidence Concerning Claimant's Time-Barred Contract Claims, asserting that Claimant's one year limitation period began to run soon after he was hired by Respondent in 2008 and that this claim was not timely filed; and
  • Motion to Strike for Violation of FINRA Rule 13309(b) and to Preclude the Introduction of Certain Testimony and Other Evidence, asserting that in terms of his claims for slander, Claimant had improperly amended his pleadings and that the one-year statute of limitations for slander had expired. 
Claimant asserted compliance with all requirements to timely file its motions and argued that its breach of contract claim was filed within one-year of the alleged event. Claimant sought reimbursement of $10,000 for attorneys' fee to respond to Respondent's motions, and asked that Respondent be further sanctioned by having its Answer struck.

On November 2, 2011, the FINRA Arbitration Panel issued an Order deferring its decision, which it subsequently rendered at the outset of the evidentiary hearing. The Panel

  • denied Respondent's Motion to Preclude;
  • granted Respondent's Motion to Strike and to Preclude as they pertained to Claimant's slander claim;
  • denied Claimant's request to strike Respondent's Answerand Counterclaim as a result of discovery violations; and
  • granted Claimant's requested $10,000.00 in  attorneys' fees.


Following the hearing, the FINRA Arbitration Panel found Respondent liable and ordered it to pay to Claimant:

  • $1,664,431.00 in lost wages as compensatory damages plus 10% interest accruing 30 days following the date of service of this award until paid in full;
  • $1,664,431.00 in punitive damages plus damages plus 10% interest accruing 30 days following the date of service of this award until paid in full; and
  • $317,966.00, representing attorneys' fees (includes the $10,000.00 previously awarded)

Separately, the Panel found Claimant liable and ordered him to pay to Respondent of $854,492.70, representing repayment of the balance due under the Note plus 10% interest accuring 30 days following the date of service of this award until paid in full.


As if the Panel's award of some $2 Million in punitive damages and attorneys' fees didn't send enough of a message, the Panel spelled it out:

The Panel finds that Respondent, through its agent, a DBSI Managing Director with DBSI's Global Markets division, systematically blocked Claimant from conducting a securities business with institutional clients (both broker/dealer and non-broker/dealer), without regard as to whether such clients were othenwise "covered" by the agent's division and without regard to Respondent's ability to increase revenue through Claimant's employment with Respondent's Atlanta branch office. The Panel finds that the Managing Director's conduct toward Claimant was reprehensible. . .

[T]he Panel recommends that repayment of the promissory note should be credited to Respondent's Private Client Services division in such a way that the Atlanta branch office is made whole (i.e., the Atlanta branch office should not be charged any or all or part of Claimant's award and Respondent's Counterclaim award should also be credited toward the Atlanta branch.) The Panel finds that Respondent's Atlanta branch manager did everything in her power to assist both Claimant and Respondent as a whole during Claimant's employment to develop a working relationship across different divisions of Respondent that would ultimately increase total revenue for Respondent. The Panel further recommends that Respondent internally assess the entire amount of Claimant's award, attorneys' fees and other arbitration costs against Respondent's Global Markets division.

Bill Singer's Comment

The Panel finds that the Managing Director's conduct toward Claimant was reprehensible.

Whoa, you can't get much nastier than that.  On the other hand, the Decisionisn't incendiary in its language or merely a jeremiad against large Wall Street firms.  To the contrary, this Panel seems to have been deliberate in its analysis and quite tempered with its characterizations.

For example, balancing out the Panel's apparent disgust with the conduct of the unnamed Managing Director was its complimentary references about Respondent's  Atlanta Branch Manager, who was described as having done "everything in her power to assist both Claimant and Respondent as a whole during Claimant's employment to develop a working relationship across different divisions of Respondent that would ultimately increase total revenue for Respondent."

The fact pattern in this arbitration is not unique. So-called "coverage" disputes and attempts by management to "jam up" a registered person's business are a growing area of complaint.  Given the recent tumultuous years on Wall Street, there's been a lot of consolidation among brokerage firms, often resulting in more than one broker/trader covering the same large account.

Sometimes, the firm sits everyone down and fashions a working arrangement. Sometimes, the firm does a cost-benefits analysis and realizes that Jill is less costly than Jack.  Now, hmmm, if only there were a way, somehow, maybe, to force out Jack and keep Jill, gee, we could make more money servicing the same accounts.  And, going with that though, what if we precipitated a crisis with Jack, tossed him to the curb, locked him out of the firm, and, you know, had Jill call his clients while he was naked and shivering on the sidewalk?  Interesting idea . . . no?  For Jill but not for Jack.

Don't downplay the magnitude of this issue.  It's a major sore spot in the industry.  Consider all the brokers and traders who handled account X at Lehman Brothers, at Wachovia, at Bear Stearns, at Smith Barney, at Merrill Lynch - add as many other firms that have either gone out of business, merged into others, or been acquired since the onset of the Great Recession.Now imagine that two or three brokers/traders from those firms all wind up under the same roof, and now, to make it even worse, let's imagine that Joe Smith, a ten-year veteran at the surviving brokerage firm has been servicing account X.  From Joe's perspective, I've been here for ten years, built my book from scratch, made millions for my firm.  I was here first. I got dibs on these accounts.

So now we have Jack, Jill, and Joe all wanting to do business with the same account X.  Joe says his book is being poached.  Jack and Jill say that they would never have joined the firm if they had been told that they couldn't transfer account X.  Now you have a world class turf war.

This nonsense occurs all over Wall Street, and particularly at the largest firms where individuals are disputing who's covering which account and who had dibs.  Citigroup, Merrill, JP Morgan, UBS, Morgan Stanley - you name it, it's an issue. Worse, the bigger the firm, the more bucks made from an account, the more likely it is for a couple of traders or brokers to come to blows.

Making for an even bigger mess,  sometimes the suits in the executive suites like to play politics or favorites.  There's always some jerk who thinks he or she is being a clever manager by inciting internecine warfare among brokers or on a trading desk.  Trust me, after 30 years on the Street, I've heard it and seen it all.  Some jerk thinks he's stoking the fires of competition and productivity by setting his salesforce or traders against each other. Keeps ‘em on their toes, this tactician tells me.  Makes ‘em work harder, he smirks.

Reprehensible, a FINRA Arbitration Panel might just as easily pronounce.