FINRA Arbitrators Deal With Vague And Ambiguous Employment Agreements

April 1, 2016

Well-drafted contracts and agreements are useful as a sword or a shield, depending upon which party is seeking the protection of the terms. When documents say what they mean and mean what they say, all sorts of relationships move forward on firmer ground, and all sorts of relationships may be terminated with more confidence as to what's fair and appropriate. Unfortunately, too much of the paperwork that has made its way into our daily dealings has been cut-and-pasted into endless versions and revisions without anyone actually reading the resulting monstrosity and asking just what the hell does it all mean. In two Wall Street employment disputes that resulted in FINRA arbitrations, we see how ambiguous and vague language becomes the proverbial monkey-wrench in the machinery.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in July 2014, former Raymond James Financial Services, Inc. ("RJFS") registered representative Claimant Dyer asserted breaches of contract and fiduciary duty; constructive fraud; conversion; unfair and deceptive trade practice;, misappropriation of trade secrets; tortious interference with contract, and violations of FINRA Rules. In the Matter of the FINRA Arbitration Between Charles E. Dyer, Sr., Claimant, vs. Kirk E. Smith , James G. Brown, and Raymond James Financial Services, Inc., Respondents (FINRA Arbitration 14-02268, March 9, 2016).

FA Agreement

Claimant Dyer alleged that around June 23, 2008, he, Respondent Brown, and Respondent RJFS entered into a Financial Advisor Agreement ("FA Agreement"), which, among other terms, required at least 30-days prior written of any termination by either party.

Brown and Smith Employment Contract

Around October 22, 2011, Claimant Dyer and Respondent Smith entered into an employment contract ("Employment Contract") pursuant to which Respondent Smith had agreed to work exclusively with Claimant Dyer.

Take A Hike

On October 7 2013, Respondent Brown allegedly telephoned Claimant Dyer to inform him of his immediate termination as an RJFS financial advisor. Claimant Dyer asserts that Respondent Brown's telephone call terminating him was not preceded by the requisite 30-days-prior-written-notice and, as such, breached the FA Agreement. Further, Claimant Dyer alleges that with Respondent Brown's knowledge and consent, Respondent Smith began contacting Claimant's clients and suggested that they remain at RJFS after Claimant's departure and allow either Respondent Brown and/or Respondent Smith to serve as their new financial advisors.

Damages Sought

By the close of the FINRA Arbitration hearing, Claimant Dyer sought $421,531.00 in compensatory damages plus $500,000 punitive damages; $1 million "Treble Damages", attorneys's fee, and costs.

Respondents generally denied the allegations and asserted various affirmative defenses.

The Panel adjourned the hearing on December 16, 2015, due to the hospitalization of
Respondent Smith.


The FINRA Arbitration Panel found the following Respondents liable to and ordered them to pay to Claimant Dyer:
  • Respondent Smith: $20,000 compensatory damages for breaches of the Employment Contract and fiduciary duty; and
  • Respondent RJFS: $180,000.00 in compensatory damages for breach of the FA Agreement and $90,000 in attorneys's fees.
Required 30-Business Days Notice

In offering the rationale for imposing damages upon Respondent RJFS under the breach of the FA Agreement, the Panel explained that [Ed: underlining in original]:

Considering the issues*, the testimony, and documentary evidence, the ambiguous termination section (§3) of the Dyer-RJFS FA Agreement only permitted parties (Dyer and RJFS) to terminate it. Under subsection (c), Brown could instruct RJFS to do so., but RJFS had to determine whether the termination was "for cause" under subsection (b) with no prior notice or for other reasons under subsection (a), as in this case, which subsection required Dyer to be given 30 business-days prior notice of termination, which requirement RJFS employees discussed. RJFS materially breached Dyer's FA Agreement by failing to give him the required prior notice thereby preventing Dyer from conducting and/or selling his on-going profitable business.

*Indemnity obligations (if any) were not issues within the scope of this arbitration.

Bill Singer's Comment

Compliments to this FINRA Arbitration Panel for setting forth the facts and providing us with insight into their deliberations.

Claimant Dyer argued that the FA Agreement gave the power of termination only to its signatories: Dyer and RJFS. Consequently, Dyer could quit or RJFS could fire him but nowhere was there a provision for Respondent Brown to fire Dyer under the FA Agreement. In light of the fact that the arbitrators appear to have found that, in fact, Brown fired Dyer, now what? Note that the FINRA Arbitration Panel made a pointed, barbed reference to  the FA Agreement's "ambiguous termination section." Ambiguous ain't a great word to be reading when you're the party who drafted the agreement and you are attempting to benefit from whatever protection you thought that agreement gave you.

The FINRA Arbitration Panel appears to have concluded that under the terms of the FA Agreement, a "for cause" termination could be undertaken immediately and did not require the 30-days prior written notice to Dyer. As explained in the arbitrators's analysis, however, even if Respondent Brown had believed that Claimant Dyer had engaged in some conduct that rose to the level of  warranting a "for cause" termination, the FA Agreement provided that only RJFS could go through the mechanics of deciding whether the termination was "for cause."

Alas, RJFS and Brown got a problem -- and one of their own making given the "ambiguous" nature of the FA Agreement's "termination" provisions. The arbitrators appear to have found that Brown determined that Dyer had engaged in conduct that rose to the level of "for cause" misconduct. Brown, however, was not a signatory to the FA Agreement, which vested the mechanics of finding "for cause" solely with RJFS. Under that set of facts, the arbitrators found that Dyer was entitled to 30-day prior written notice of his termination.  Given the arbitrators's decision, we must infer that they found that RJFS didn't live up to its contractual obligations and breached the agreement by ceding the "for cause" analysis and determination to Brown.

Notwithstanding Respondent Brown's involvement in this employment dispute, he wasn't ordered to pay any damages and emerged unscathed. Respondent Smith got hit with $20,000 in compensatory damages for breaching his contract with Claimant Dyer; and Respondent RJFS was ordered to fork over $270,000 in damages and fees for its breach of the FA Agreement with Dyer.

You might think that given the high-stakes world of Wall Street and the prevalence of industry lawyers and massive contracts with pages of small print that these types of drafting snafus aren't so common. Fact is, this isn't that unusual a problem. Trust me, I've been reading industry agreements and contract for over three decades and I can't tell you how often I've laughed at some absurd paragraph or tried to chart out an impossible provision that was circular in its logic and absolutely immune to any effort to decipher the obligations set forth.

By way of another example, consider In the Matter  of the Arbitration Between Reliastar Life Insurance Company and Voya America Equities, Inc., Claimants, vs. James William Boldischar, Respondent (FINRA Arbitration 14-03384, August 12, 2015), where a FINRA Arbitration Panel found that Respondent Boldischar was required to repay commissions to Claimants Reliastar and Voya pursuant to the terms of Sales Incentive Plans ("SIPs"). In offering its rationale, the Boldischar Panel explained, in part:

The cancellation of policies by the insured customers during the first year resulted in reversals and chargebacks of commissions paid. To rule otherwise would mean that Respondent, as he argued, could sell policies that were later cancelled with no earnings to the issuer, yet be paid large commissions, even though the issuer received no benefit, and retain those commissions if he quit the employment. There would be no problem if that were the actual deal, but it was not. The chargebacks were understood by both parties to reverse the previously paid commissions. Only when it became time to pay did Respondent discover some vague language in the SIPs that might benefit him. This language in the SIPs merely said that certain other payments due to Respondent would be cancelled, but there was no limiting the payment obligation to only those amounts.

In Boldischar,  the registered representative booked business and was paid the earned commissions; however, when the customers cancelled their policies within the first year, the commissions were reversed and in keeping with industry practice, the broker should have repaid those sums back to his former employer. Barely disguising their annoyance, the FINRA arbitrators concluded that "o
nly when it became time to pay did Respondent discover some vague language in the SIPs that might benefit him." Notwithstanding the arbitrators's annoyance with that tactic, the Panel still had to give Boldischar some credit, which they did, as evidenced by this:

The drafting of the SIPs could have been clearer, thus we are requiring that the Reliastar pay 25% of the FINRA fees and costs . .

Although the Panel was not convinced that Respondent Boldischar acted in good-faith in refusing to repay, the arbitrators also expressed their chagrin that Reliastar and/or Voya had drafted a somewhat vague legal agreement (which, but for the sloppiness, maybe the parties and the arbitrators wouldn't have had to convene a hearing). The cost of that chagrin was an order to pay 25% of the FINRA fees and costs of the proceeding (presumably in lieu of placing the full burden on Respondent).

In Boldischar we have a somewhat unsympathetic respondent. Imagine, however, that the Reliastar/Voya employee was not someone in receipt of re-payable commissions but, to the contrary, someone from whom the firm was seeking fees or expenses. For example, imagine that some young industry newbie joins his or her first member firm and is presented with a mass of paperwork as part of the pre-hire and new-hire package. I've seen the nonsense and I"m sure that you have too: an overwhelming array of contracts, agreements, policies, and incentive plans -- all of which the kid is told must be quickly signed and initialed in countless places. And, of course, the message, the gist, the pressure is to do it here and now: ya really need to take it home and have some lawyer look it over?  Of course, somewhere, buried amid dozens or hundreds of paragraphs, is some warning that an "early departure" from the firm will result in an obligation to pay so-called "Estimated Costs."  Ah yes, estimated costs. I always love that proposition.

And what about that poor kid that was dazzled by the promises of a gateway to Wall Street? If the kid doesn't produce, the firm kicks him to the curb. If the kid feels he was lied to and misled about the real nature of his job and quits, the former firm demands immediate repayment of the Estimated Expenses. Amazingly, the demanded repayment is to-the-penny of what was previously set forth as merely "Estimated."

I've seen everything including the kitchen sink tossed under the heading of Estimated Expenses. There is crap like "Desk Fee" or "Initiation Costs" or "Training Costs" or "Onboard Fee." I see most of those charges as shameful attempts to squeeze a few bucks out of the unwashed and the uninitiated. Every so often, however, one of these kids refuses to roll over and play dead and asks the firm to provide documentation showing that the "estimated" fees and costs were actually incurred. Oh my, ask for proof of estimated charges and all of a sudden that elicits threats of collection efforts and lawsuits.