Stifel Prevails In Arbitration But Former Hilltop Employees Hit With Awards

August 21, 2017

In January 2016, Hilltop Holdings Inc. announced that it had merged its broker-dealer subsidiaries First Southwest Company LLC and Hilltop Securities, Inc., which effectively folded the former Southwest Securities Inc. into Hilltop Securities. Inc. As is often the case when such mergers are first rumored to be happening, and, then, when they are confirmed and, thereafter, when they are finalized, some registered representatives get happy feet. Sometimes, the motivation to move on had been simmering for a long time. In other circumstances, employees of the old firm don't particularly like what they see in terms of the likely new firm. And, just as often, when change is in the air, it simply proves contagious. In a recent FINRA intra-industry arbitration, former employer Hilltop Securities seems to have been angered by the departure of six employees and not all that thrilled with the conduct of their new employer Stifel, Nicolaus. A multi-million-dollar lawsuit ensued.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in October 2015,  Claimant Hilltop Securities, Inc. asserted claims against former employees and their new employer Stifel, Nicolaus & Co., Inc.:
  • aiding and abetting breaches of fiduciary duty and contract against Respondent Stifel;
  • breach of fiduciary duty against Respondents Farmer, Frank, Harvey, Kersh, Levinson, and Osbourne; and
  • violation of the Protocol for Broker Recruiting; Federal and California Computer Fraud; Misappropriation of Confidential Client Information and Proprietary Business Information; Tortious Interference with Prospective Economic Advantage/Business Relations; Unfair Competition and Violation of California Business and Professions Code § 17200; Conversion; and Theft as against all Respondents.
In the Matter of the FINRA Arbitration Between Southwest Securities, Inc. n/k/a Hilltop Securities Inc., Claimant, vs. Wyatt Thomas Farmer; Harvey Frank; Andrew Scott Harvey; Barry Edward Kersh; Brett David Levinson; Carla Renee Osbourne; and Stifel, Nicolaus & Co., Inc., Respondents (FINRA Arbitration 15-02863, August 10 2017).

Relief Requested

Claimant Hilltop requested a joint and several award against the Respondents for compensatory, consequential, punitive, exemplary, statutory, and treble damages; interest, attorneys' fees, and costs.

Additionally, Claimant sought orders:
  • compelling Respondents to return to Claimant any and all of its records and to certify under penalty of perjury that all the records (including copies and electronic versions) were returned;
  • prohibiting Respondents from:
    • soliciting any of Claimant's customers or prospective customers identified in the returned records; and
    • misappropriating any of Claimant's confidential and/or proprietary business and client information in the future.
At the close of the hearing, Claimant requested a joint and several award against Respondents (not including Kersh) for:
  1. $3,880,878.00 in compensatory damages;
  2. $1,000,000.00 in consequential damages for documents destroyed;
  3. $1,000,000.00 in consequential damages for damage to reputation of business
  4. $250,000.00 in consequential damages for solicitation
  5. $11,400,000.00 in punitive damages;
  6. approximately $1,000,000.00 in attorneys' fees and costs of suit (including expert fees).

Respondents generally denied the allegations and with the exception of Respondent Kersh asserted various affirmative defenses.

Motion to Dismiss and Request for Damages

On November 1, 2016, Kersh filed a Motion to Dismiss and Request for Damages, which Claimant opposed. Following a pre-hearing conference to hear oral arguments on the motion, by order dated January 27, 2017, the Panel granted Kersh's Motion to Dismiss but denied his Request for Damages. The Panel found that Kersh was not a proper party to this claim because he was not associated with the account(s) or conduct at issue.

Motions for Evidentiary Sanctions

On November 8, 2016, Claimant filed an Amended Motion for Evidentiary Sanctions
Against Respondents (not including Kersh) and, thereafter, on February 17, 2017, filed an Emergency Motion for Evidentiary Sanctions , which were both opposed.  By order dated March 2, 2017, the Panel denied Claimant's motions.


The FINRA Arbitration Panel denied all of Claimant's claims against Respondent Stifel.

The FINRA Arbitration Panel found the following Respondents liable to and ordered each to pay to Claimant:

  • $35,000.00 in compensatory damages with 10% interest until paid in full;
  • $15,000.00 in punitive damages pursuant to Cal. Civ. Code  Sec. 3294 with 10% interest until paid in full;
  • $60,000.00 in attorneys' fees pursuant to Cal. Penal Code 502(e) and 18 USC 1030; and
  • $30,000.00 in costs.
  • $35,000.00 in compensatory damages with 10% interest until paid in full;
  • $65,000.00 in punitive damages pursuant to Cal. Civ. Code. Sec. 3294 with 10% interest until paid in full;
  • $60,000.00 in attorneys' fees pursuant to Cal. Penal Code 502(e) and 18 USC 1030; and
  • $30,000.00 in costs.
  • $25,000.00 in compensatory damages with 10% interest until paid in full; and
  • $20,000.00 in costs.
  • $15,000.00 in compensatory damages with 10% interest until paid in full;
  • $5,000.00 in punitive damages pursuant to Cal. Civ. Code. Sec. 3294 with 10% interest until paid in full;
  • $10,000.00 in costs.
The FINRA Arbitration Panel noted in the Decision that Osbourne had "contributed to the attorneys' fees and costs incurred in connection with this matter . . ." Accordingly, the Panel found Osbourne liable for and ordered him to pay to Claimant:
  • $5,000.00 in punitive damages pursuant to Cal. Civ. Code. Sec. 3294 with 10% interest until paid in full;
  • $10,000.00 in attorneys' fees pursuant to Cal. Penal Code 502(e) and 18 USC 1030; and
  • $10,000.00 in costs.

Bill Singer's Comment

Compliments to these arbitrators for publishing a FINRA Arbitration Decision that provides sufficient content and context so as to render the case intelligible.

As to who's the winner and who's the loser(s), well, as is often the outcome with such industry disputes, it all sort of depends on your perspective and the respective goals of the litigants.

Claimant Hilltop came out swinging for the fences -- frankly, let's make that the moon. The former employer asked for just under $20 million in various damages.  The Panel awarded Claimant about $427,000 in damages, fees, and costs.  You do the math. Was it worth it? Guess that sort of depends upon whether the goal here was to "send a message." As to whether that missive was received with disdain and the awards viewed as acceptable costs (solely based upon comparison to the demands for damages); or, in the alternative, the total of six-figures in awards drew blood -- that's an answer that only the Respondents can each provide. Unquestionably, Hilltop's lawsuit against Stifel was a dud.  Finally, note that the Panel denied Claimant's request for orders compelling the return of records and prohibiting both solicitation and misappropriation.

One aspect to the Award that I don't particularly like is the order of damages, fees, and costs against Respondent Osbourne. Truly, I don't understand what is meant by a finding that a given respondent's "conduct' contributed to the incurring of costs and fees by a claimant. The arbitrators did not award any compensatory damages against Respondent Osbourne. As such, I don't have a good feel as to how an individual could not engage in any conduct that caused compensatory damages yet be sanctioned via punitive damages, attorneys' fees, and costs. Not saying there is no explanation -- I can imagine a few -- but I should not be reading a FINRA Arbitration Decision and left wondering about such an oddball yet important finding.

Imagine that you are a former employee of a firm and your former employer accuses you of all sorts of misconduct for which you are adamant that you are not guilty. Now, let's assume that you  tell your former employer to "drop dead" when it demands that you fully cooperate in its investigation of its allegations against you. Subsequently, the firm names you as a respondent. After a hearing, the Panel finds you not guilty of causing any compensable damages but apparently blames you for contributing to your former employer's legal fees and costs. The Panel sanctions you to the tune of $25,000 in punitive damages, fees, and costs. What????

It is very clear in the Decision that all charges against Respondent Stifel were dismissed; that compensatory damages were awarded against Respondents Harvey, Levinson, Frank, and Farmer; and that no compensatory damages were awarded against Respondent Osbourne. That's a somewhat bizarre outcome to have a respondent against whom no finding of compensatory damage is made (when such a finding was made against four other respondents) yet his conduct incurred the imposition of punitive damages, costs, and fees. In light of the fact that many folks can do many things during the course of any litigation to cause any party to incur legal fees and costs, I note my disapproval of the absence of any explanation in the FINRA Arbitration Decision as to this issue.