You Owe Me! A Referral Fee FINRA Arbitration Battle

August 3, 2018

Wall Street's old commission system ain't what it used to be. We got fewer big broker-dealers and they arbitrarily adjust the compensation grid in ways that inexorably lower the percentages earned on increasingly higher production levels coupled with so-called "incentives" to push dubious house-product and to cross-sell and up-sell. As the trend seems to be in the direction of jettisoning commissions for salaries, many who once walked the broker-dealer registered representative path are now headed for the registered investment advisor byway. Unfortunately, with the growth of robo-advisors and a sense that we may be nearing an RIA saturation point, a lot of folks are caught between staying and going, or simply throwing in the towel and finding another career. Bitcoin anyone? Cannabis sales anyone? For the intrepid who are still hanging in with the FINRA member firm model, they are increasingly apt to explore outside business activities, private securities transactions, and ways to generate referral fees. In a recent FINRA arbitration, we have a registered person who believes he was screwed out of a fee for referring VA/Medicaid planning clients. It would seem that the contra-parties to his referral fee agreement have a different view. Hence, the genesis of a lawsuit.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in June 2017, and amended thereafter, Claimant Smitka initially asserted fraud, breach of contract, unjust enrichment/quantum meruit, declaratory judgment, tortious interference with contract, and civil conspiracy. The causes of action related to Claimant's allegations that Respondent Affinity Asset management and Respondent Roberts, in violation of a written agreement between him and Affinity and Roberts dated November 19, 2017, had failed to compensate him for the exclusive referrals of clients seeking VA/Medicaid planning. Further, Claimant alleged that Respondent Client One and Respondent Tuma conspired with Respondent Affinity and Respondent Roberts to stop issuing payments to Claimant for the fees and commissions earned pursuant to the Agreement. Claimant sought over $75,000 in compensatory damages, punitive damages, interest, costs, and expenses. 

In the Matter of the FINRA Arbitration Between: 
Jason James Smitka, Claimant, vs. Affinity Asset Management, LLC, Client One Securities, LLC, Mark Ronald Roberts, and Michael Charles Tuma , Respondents

-- and --

Affinity Asset Management, LLC and Mark Ronald Roberts, Counter-Claimants, v. Jason James Smitka, Counter-Respondent (FINRA Arbitration 17-01750, July 27, 2018).

Respondents generally denied the allegations and asserted various affirmative defenses. 


Respondents Affinity and Roberts Counterclaimed against Smitka asserting breach of contract, tortious interference with a prospective business relationship, and defamation. Counterclaimants alleged that while subject to the Agreement, Smitka had begun servicing the investment needs of clients that he was obligated to refer to Affinity and Roberts. Counterclaimants sought $450,000 in compensatory damages and attorneys' fees.

Tuma Dismissed

At the conclusion of Claimant's case-in-chief, Respondent At the conclusion of Claimant's case-in-chief, Respondent Tuma moved to dismiss Claimant's claims, which the FINRA Arbitration Panel granted. The Panel offered the following rationale for its dismissal:

The Motion to Dismiss was granted in favor of Tuma based on Claimant's failure to meet his burden of proof on whether Tuma intentionally interfered or acted without justification as well as providing no evidence of underlying tort or conspiracy between Tuma and Roberts. 


The FINRA Arbitration Panel found Respondents Affinity and Roberts jointly and severally liable  and ordered them to pay to Claimant Smitka $88,295.14 in compensatory damages. As to the viability of the Agreement, the Panel ruled as follows:

The written agreement between Roberts and Claimant dated November 19, 2014, was terminated as of April 2016, as to new referrals. No payments are due on clients who may have been referred by Claimant, but who did not make any initial deposits with Roberts until after April 2016. 

Pursuant to the November 19, 2014, written agreement between Roberts and Claimant, Roberts owes Claimant a continuing duty to make payments equal to 50% of the net fees and commissions received by Roberts on deposits made within three years of the date of first deposit if an initial deposit was made before April 2016, including those Joint Rep Code clients that make up the fees shown in Claimant's "Plaintiff's" Ex. 30-A, admitted at the June 26-28, 2018, arbitration hearing. 

The Panel denied Counterclaimants' counterclaims and Claimant's claims against Respondent Client One. 

Bill Singer's Comment

Referral fees are often the subject of many disputes between those who think they've earned them and those who don't believe they were earned.  Often, the disputes are grounded in a sincere disagreement about whether an alleged referral actually resulted in a "sale" -- and often the issue is that we already knew the party you had sent to us, or we had a previous relationship with that party, or what eventually developed from your referral wasn't what was covered in the agreement. Another common occurrence is the "falling out" between or among various parties to a referral agreement. When that happens, the non-payment of the fee is predicated upon such assertions as you breached the agreement or you engaged in fraud or you owe us money for X and we're deducting that from any referral fee.

It's not everyday that a FINRA Arbitration involves a referral-fee dispute. As such, that's what caught my eye. Unfortunately, the FINRA Arbitration Decision doesn't offer any content or context to help us understand what constituted the alleged referral agreement and why Claimant Smitka felt his only recourse was to sue. In the end, Respondents Roberts and Affinity are jointly and severally liable for some $88,000 in compensatory damages attendant to the fees at issue.