Trade Error And Citigroup's Dubious Loss Of Confidence

September 25, 2014

Ah yes, the old "loss of confidence" explanation for terminating a Wall Street employee. Now there's a reason for termination that garners more than a few raised eyebrows and snickers. I mean, really? I've represented enough former employees to know that this catch-all phrase is often little more than a convenient way for an employer to throw someone under the bus, particularly if there are concerns of a customer complaint or regulatory investigation. Consider this recent arbitration dispute brought by an employee who was apparently given misinformation about the settlement of shares involved in a reverse split.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in September 2014,  registered representative Claimant Palacios, proceeding pro se, asserted that he had been wrongfully terminated by his former employer Respondent Citigroup Global Markets Inc. ("CGMI") and, further, that the firm had breached an oral agreement between the two parties. At the close of the FINRA Arbitration, Claimant Palacios sought $375,000 in damages (derived from the calculation of $75,000 in damages for each of five years). In the Matter of the FINRA Arbitration Between Harold Palacios, Claimant, vs. Citigroup Global Markets Inc., Respondent (FINRA Arbitration 12-03816, September 16, 2014).

Expungement Request

On the first day of the arbitration hearings, Claimant moved to amend his  Statement of Claim in order to obtain the relief of the expungement from his Uniform Termination Notice for Securities Industry Registration ("Form U5") and Central Registration  Depository records ("CRD") records of the "Reason For Termination" set forth in the Form U5 and, further, to amend that section. Notwithstanding Respondent's objection to the request, the FINRA Arbitration Panel decided to address the motion in the Arbitration Decision.

1999 Hiring

The FINRA Arbitration Decision explains that in 1999, Claimant Palacios was hired by Respondent CGMI as a Customer Service Assistant. In that position, Claimant would be the sole registered  assistant for six Financial Advisors ("FAs").

Rejected July 29th Sell Order

On July 29, 2009, about a decade after starting his job, Claimant took an order from a client to sell 32,000 shares of Georgia Gulf Corp. ("GGC") stock, but when Claimant attempted to enter the sell order it was rejected by Respondent CGMI's automated trading system because it exceeded the 25,000 share limitation, which required a branch manager's approval.

Branch Manager Approves

In accordance with Respondent's protocol, the sell order was approved by a branch manager after that individual had confirmed that the shares to be sold existed in the account.

Unfortunately, there was a wrinkle. Of course there was; otherwise we wouldn't be reading about a wrongful termination dispute involving a disputed execution by Claimant.

Reverse Split

On July 29, 2009, GGC stock was in the process of a 25:1  reverse split. Claimant, however, denied seeing any notice of the split on his order-entry screen during the two occasions when he had attempted to enter the sell order. Respondent contended, however, that the notice of the reverse split had been prominently displayed in red typeface on the screen at the times of entry.

July 30

On July 30, Claimant received a telephone call from the client, who had discovered a significant deficit in his account. It appears that the 25,000 share sell order was executed as against the post-split position and not the pre-split shares. Pursuant to the split, the customer's legacy 32,000 shares would have been altered into 1,280 post-split shares; unfortunately, his account statement was showing a 30,720 short position.  

Failing Support

After getting an earful from his customer, Claimant Palacios contacted Respondent's Financial Advisor Support unit ("Support") for clarification about the alleged short position and was informed that the deficit would be resolved on trade date plus 3 business days settlement ("T+3"). Consequently, Claimant understood from Support that on August 3, 2009,the 30,720 short would be adjusted per the reverse split and the account would show the appropriate net position.

As explained in the FINRA Arbitration Decision:

This advice turned out to be wrong. On July 31, T+2, the support office in New York  sent an e-mail at 4:42 a.m. Pacific Time to the FA and the branch manager (OSJ), not Claimant, that the information previously provided was incorrect and that the trade  would not adjust upon settlement on August 3, and would instead settle on July 31, T+2. . .

As the arbitrators seem to establish, on July 30th, Claimant contacted Support and was told that there was, in fact, a GGC short position but that deficit would be cleared up on T+3. In direct contradiction to that advice, on July 31st, Support sends an email to Claimant's FA and Branch Manager (but apparently not to Claimant!) acknowledging that the prior advice was wrong.  Unfortunately, it's not exactly clear whether Support's email asserted that:
  1. The trade would settle in an adjusted fashion on July 31st rather than the previously stated August 3; or
  2. The trade would settle on July 31 but in a non-adjusted manner that would persist in maintaining the short position.
Based upon the totality of circumstances, I am assuming and inferring that Support's email intended to convery #2 above.


Of course, we all know how a seemingly minor error snowballs into a disaster of epic proportions, and prepare yourself for one such evolution. Seems that the July 31st email, that critical warning that something was amiss and someone was mistaken, well, that email apparently sat in various in-boxes without so much as a glance. No one in the branch office did anything about it. The Financial Advisor whose customer was at risk didn't do anything. Not a single compliance officer attended to the ominous circumstances set forth in the email. Not a single person at the higher-up Office of Supervisory Jurisdiction lifted a finger.  

SIDE BAR: Let's keep in mind that the email was NOT sent directly to Claimant Palacios.

Trade Error

After the market closed on July 31st and the apparently erroneous settlement that created an short in the customer's account was a matter of record, at that point it seems all hell started to break loose. In the end, as was appropriate, Respondent CGMI made the customer whole and the loss was charged off as a "trade error" in equal parts to the branch office and Support.  

SIDE BAR: Let me underscore that Respondent CGMI did NOT charge off any of the loss directly to Claimant Palacios.

A Confidence Racket?

Saddled with reimbursing the customer and probably a bit perplexed as to the non-action attendant to the email and the apparent disinformation inherent in its trade settling, Respondent CGMI started an investigation replete with interviews. On September 24, 2009, the firm terminated Claimant Palacios.  As explained in the Decision, Claimant was not terminated:

[b]ecause  of the trade error. Rather, the personnel involved in the termination decision terminated  him because, as was expressed in the Form U5 - "Loss of confidence following an investigation into an administrative error over a reverse stock split."

This "loss of confidence" flowed from the assertion that Claimant did not disclose in his August 4 written time line of events that he had first learned from the client about the short in his (the client's) account, or that he had spoken with an FA support person on July 30. No written report of interviews with Claimant was entered into evidence; nor was any interviewer called as a witness. On the other hand. Claimant testified without contradiction that the investigator(s) never asked him from whom he first learned about the short or whether he had ever spoken with the client about it before it became a "trade error." Claimant also testified that he relied on what he was told by the support unit that the trade would adjust upon settlement at the close of business on August 3 -- meaning that Claimant could have reasonably believed there was no "trade error" or "discrepancy" to address until after market close on August 3. . .

Umm, WTF??? Lemme see if I got this.  Claimant Palacios was fired because CGMI had lost confidence in him?  And that lost confidence was, in large part, apparently caused by the misinformation provided to Claimant by Support and, further, by a whole batch of folks dropping the ball in response to an email that put virtually everyone on notice that a disaster was in the making.  Oh, yeah, sure, CGMI lost "confidence" in Claimant.

To the FINRA arbitrators' credit, they noted:

While it cannot be gainsaid that Respondent had a right to "lose confidence" in Claimant  in connection with its investigation of this incident, this does not mean that Claimant was dishonest, or lied with an intent to deceive. Rather Claimant had a right to rely on the information he received from FA support about the trade adjusting on August 3, the projected settlement date.  

You get that?  The Panel said that Claimant Palacios "had a right to rely on the information he received from FA support . . ."  The arbitrators affirmed that Claimant's reliance was appropriate; and, it was also nice that the arbitrators went out of their way to make it clear that they were not necessarily equating Respondent CGMI's loss of confidence with any suggestion that Claimant had been "dishonest, or lied with an intent to deceive."

No Viable Alternative

Inexplicably, the Decision careens off the roadway and goes headlong over the cliff with this:

Therefore, Respondent's report in Claimant's Form U5 about the reason for his termination being "loss of confidence" is not inaccurate, wrongful or malicious. Moreover, even if this Panel was prepared to permit Claimant to amend his Statement of Claim to seek reformation of his Form U5, he did not suggest any viable alternative explanation of the reason(s) for his termination

The FINRA Arbitration Panel found that Respondent CGMI "had an absolute right to terminate Claimant's employment with or without cause. Therefore, Claimant's requests for relief, including damages, is denied."  And for bad measure (no . . . I am not going to add insult to Claimant's injury and call it "good" measure), the Panel denied Claimant's expungement request.

Bottom line: Claimant lost his job and loses his case.

Bill Singer's Comment

First and foremost, I compliment this FINRA Arbitration Panel for providing us with a relatively expansive statement of facts and the arbitrators' rationale for their rulings and ultimate denial of Claimant's claims.  That being said, I clearly disagree with the conclusions of the arbitrators and the outcome of this arbitration.

After more than three decades in this industry, I think that I have learned to read between the lines and detect the stink of garbage in the air.  Consequently, I don't like what I have inferred from this Decision and sure as hell don't like the smell that's wafting in the air. Not having read the exhibits or heard the testimony, I will allow that the arbitrators got it right here and that I may have misunderstood some aspects of this dispute -- if that's the case, however, then the Decision is to blame for not offering more detail or explanation. I recognize the inconsistency in complimenting the Panel for the recitation of facts and rationale in the Decision, but, on the other hand, questioning whether that document could or should have offered even more. Hey, life is full of inconsistency. This is just another example.  

Yes, the arbitrators are right: Claimant was an at-will employee and Respondent had the right to terminate him within certain legal limits. In this case, we are asked to believe that the employer had lost confidence in the employee and that cause prompted the effect of his termination. Implicit in any assertion that an employer had lost confidence in an employee is that the employee had done something to warrant that loss of confidence. Try as I have, I just can't find that predicate offense.

What did Claimant do wrong? As to what was or was not disclosed about the reverse split on Claimant's trading screen, I see nothing in the Decision that indicates the Panel believed that the disclosure was or wasn't made. Since the arbitrators heard all the testimony and failed to reach a conclusion on that issue, I am compelled to deem that point as unproven -- and you can't lose confidence in someone based upon their purported failure to observe something that they insist wasn't displayed, particularly when Support subsequently provided erroneous confirmation.  Most of us would call that the "benefit of the doubt."

In many -- and, yes, in fact, in most -- of these "wrongful termination" cases, I agree with the arbitrators that the former employee has the burden of suggesting a viable alternative explanation for "loss of confidence."  In this case, however, Claimant, who represented himself, did a commendable job of shifting that burden back on his former employer. This Panel should have concluded that Respondent CGMI's professed loss of confidence was likely more of a convenient excuse and not a believable reason for termination. Given that belief, I would have granted Claimant the requested expungement.