Wells Fargo Sues Over Transitional and Production Bonuses But Rep Fights Back

May 13, 2022

Wall Street is about nothing if not money. In today's featured dispute, we got a transitional bonus. We got production bonuses. We got promissory notes. We got a FINRA arbitration about Wells Fargo's efforts to collect $1.6 million in balances due. A federal court district court tried to figure out what was a bonus, what was a loan, and whether the arbitrators got the facts right.  Then came a Motion to Reconsider. From there, the case went up to a federal circuit court of appeals. Read today's blog to see how things turned out.

2019 FINRA Arbitration Decision

In a FINRA Arbitration Statement of Claim filed in August 2015, FINRA member firm Wells Fargo Advisors asserted breach of contract attendant to associated person Caputo's alleged non-payment of amounts due under a promissory note. Claimant Wells Fargo sought no less than $1,663,529.71 in compensatory damages, costs, and fees. In the Matter of the Arbitration Between Wells Fargo Advisors, LLC, Claimant, v. Christopher N. Caputo, Respondent (FINRA Arbitration Decision 15-02044 / July 25, 2019)

Caputo generally denied the allegations, asserted various affirmative defenses, and filed a Counterclaim asserting breaches of contract and of the implied duty of good faith and fair dealing; unconscionability based on fraudulent inducement; unjust enrichment; defamation; fraudulent inducement to accept employment, expungement and New Jersey employment law breach. Counter-Claimant Caputo sought no less than $1 million in compensatory damages, $5 million personal/reputational damages, punitive damages, costs, and fees. 

The FINRA Arbitration Panel found Respondent Caputo liable and ordered him to pay to Claimant Well Fargo $1,663,529.71 in compensatory damages plus interest. No rationale was provided for the Award.

Motion to Vacate: 2019 DNJ

On August 26, 2019, Caputo moved the United States District Court for the District of New Jersey ("DNJ") to vacate the FINRA Arbitration Award; and, thereafter, on December 2, 2019, Wells Fargo move to Confirm the Award. Christopher N. Caputo, Petitioner, v. Wells Fargo Advisors, LLC, Respondent (Opinion, DNJ, No.19-17204 / May 29, 2020) (the "May 2020 DNJ Opinion")
http://brokeandbroker.com/PDF/CaputoOpDNJ200529.pdf In setting out the relevant background of the dispute between the parties (which was not presented in any meaningful fashion in the FINRA Arbitration Decision), DNJ offered in part this: 

Pursuant to his contract, Wells Fargo Advisors agreed to provide Petitioner with a "Transitional Bonus" of $1,202,294.00, paid in installments of $12,883.50 once a month from 2011 to 2021. In addition, sometime during his tenure at Wells Fargo Advisors, Petitioner qualified to receive four separate "Production Bonuses" of $240,459.00, because his "total gross production" exceeded specific benchmarks set forth in his contract. Like the transitional bonus, the production bonuses were paid in installments, once a month over the course of a specified period. 

Petitioner elected to execute five separate loan agreements (the "Notes") that allowed him to receive each bonus upfront, in a lump sum amount. Under their terms, Petitioner agreed to reimburse Wells Fargo Advisors for the Notes, which each set forth a schedule of debt obligations; the debt obligations were matched each month by the transitional and production bonus installments that Petitioner received. The Notes also contained acceleration provisions triggered upon an event of default, including termination. In such instances, Wells Fargo Advisors was entitled under the Notes to "declare the entire principal balance of [each] Note immediately due and payable." 

During Petitioner's tenure at the firm, Wells Fargo Advisors conducted an internal investigation into Petitioner's business practices, which resulted in his discharge on December 2014. Thereafter, on August 4, 2015, Wells Fargo Advisors commenced an arbitration proceeding against Petitioner with FINRA, in order to recoup the outstanding principal owed on the Notes, along with interest, costs, and fees. Petitioner counter-claimed against Wells Fargo Advisors, alleging numerous causes of action, including: breach of contract, unconscionability based on fraudulent inducement, unjust enrichment, breach of the implied duty of good faith and fair dealing, defamation, fraudulent inducement to accept employment, expungement, and employment law breach. 

In resolving the parties' dispute, a FINRA arbitration panel of three members (the "Panel") held over 22 separate hearings that spanned from December 10, 2018 to June 21, 2019, during the course of which more than 13 witnesses testified. . . .

At pages 2 - 3 of the May 2020 DNJ Opinion

SIDE BAR: Omigod -- could Wells Fargo have conjured up a more complex and absurd bonus scheme? Let's make sure that we're all the same page with what's what.

The May 2020 DNJ Opinion states alleges that Wells Fargo paid to Caputo a $1,202,294.00 "Transitional Bonus,"  which was to be paid in monthly installments of $12,883.50 from 2011 to 2021. Okay, let's have some fun with math. Multiply $12,883.50 times 12. That should give you $154,602 per annum. Now . . . go ahead . . . explain to me how the monthly installment works out to $1,202,294 if paid for the ten years from 2011 to 2021. Let's see $154,602 times 10 equals $1,546,020 -- so that's wrong. Let's try it in reverse: $1,202,294 divided by 10 equals $120,229.40 and dividing that by 12 would give us a monthly installment of $10,019.12 -- so that's wrong too. I'm wondering if the Court bothered to check the math! If there's some other explanation for the mathematical discrepancy, it sure as hell isn't explained in the Opinion.

In addition to the somewhat incalculable "Transitional Bonus," Caputo also earned four separate "Production Bonuses" of $240,459.00, which we're told were paid monthly over what is only characterized as a "specific period of time." Gee, that's nice that payments were made over some specific period of time -- I mean, you know, like who the hell wants to get paid over a non-specific period of time, right? 

Now things get a bit more fuzzy. The May 2020 DNJ Opinion states that Caputo "elected to execute five separate loan agreements (the "Notes") that allowed him to receive each bonus upfront, in a lump sum amount." As best I can infer from the fact pattern, that would be one Note for the ten-year transitional bonus and four Notes (one each) for the four production bonuses. If you have a better idea how to make all those bonuses fit into five Notes, I'm all ears. 

So waddawegot here? Frankly, a mess, and, even more to the point: A mess that always seems the careful result of a cynical desire by Wall Street's larger firms to complicate these "bonus" transactions so that they look like a bonus but then, on second viewing, they magically transform into a "loan." When push comes to shove, it comes off as a calculated bit of legerdemain designed to bind the financial professional to the firm. Yes, quite often both parties are happy with this messy arrangement until, well, you know, until they're not. On the other hand, many consumer advocates detest these bonus/loan arrangements because the negative financial consequence of refusing to sell a toxic product may arise if the financial professionals chooses to quit rather than do something in violation of fiduciary principles or a customer's best interest. Wall Street has cleverly created a compensation package whereby quitting will trigger a repayment obligation per an acceleration provision. Again, that's not an atypical arrangement but it does raise some ethical issues when the consequence of doing the right thing may be analyzed by a financial professional as not being the right thing to do.

In furtherance of his Motion to Vacate, Petitioner Caputo argued that the FINRA Award (1) conflicts with certain public policies; and (2) was rendered in manifest disregard of the law. 

Public Policy Considerations

DNJ denied Petitioner Caputo's Motion to Vacate and granted Petitioner Wells Fargo's Motion to Confirm based upon a finding that Caputo failed to demonstrate that the dispute at issue pertained to a "well defined and dominant" public policy requiring vacatur or that the FINRA Panel had acted in manifest disregard of the law. 

Caputo attempted to portray his promissory notes (known in industry parlance as "employee forgivable loans" or "EFLs") as earned bonuses. As to how he would explain the installment nature of the loans as bonuses, Caputo allegedly offered this analysis:

[U]nder the terms of his contract, Petitioner maintains that he received bonus installments that offset his obligations under the loans each month, contingent upon his continued tenure with Wells Fargo Advisors. Id. However, in the event of his resignation or discharge from Wells Fargo Advisors, Petitioner argues that an unenforceable contractual forfeiture provision stated that he would "forfeit . . . unpaid installments . . . due under [h]is [b]onus[es]." Id. At that same time, according to Petitioner, the outstanding balance under all of his loans "become due in full out of pocket." Id. Citing various labor laws, Petitioner argues that the contract's forfeiture provision, in essence, deprived him of "wages" that he "earned," based on his performance at Wells Fargo Advisors. Moreover, according to Petitioner, Wells Fargo Advisors prevented him from working off his loan "obligation[s]," because he was discharged without cause.

At pages 8 - 9 of the May 2020 DNJ Opinion

DNJ makes it clear from the start of its analysis that "the instant dispute does not implicate notions of public policy or public harm." That's as quick and blunt a determination that a court will make. In contrast to any public policy issue, the Court characterized Caputo's argument as describing;

nothing more than a knowing and willing private contractual relationship between himself and Wells Fargo Advisors. Thus, because the parties' dispute, here, is contractual in nature, Petitioner cannot seek to vacate the Award unless he demonstrates that the "arbitrators exceeded their powers" under § 10(a)(4) of the FAA, based on their decision to enforce the Notes as independent and valid loan agreements. . . .

At page 11 of the May 2020 DNJ Opinion

As it progresses with its analysis, DNJ offers these further findings [Ed: footnotes omitted]:

Here, it is undisputed that Petitioner was eligible to receive five separate bonuses during his tenure at Wells Fargo Advisors, including one "transitional" and four "production" bonuses. Pursuant to the terms of his employment contract, the bonuses were structured such that Petitioner would acquire them over time, paid once a month in separate installments during the course of a specified period. However, because Petitioner elected to receive the future bonus installments upfront in an immediate lump sum, he executed five separate Notes in amounts equaling each of his bonuses. Notwithstanding the five separate Notes that the parties executed, Wells Fargo Advisors continued to provide Petitioner with transitional and production bonus installments each month, which "offset" Petitioner's monthly debt obligations under the Notes. 

Petitioner argues that the Notes do not constitute bona fide loan agreements. Citing out-of-district bankruptcy court cases, Petitioner contends that "[e]ach note should . . . be considered together with the bonus agreement on which the note is predicated." Petr.'s Opp., at 17. Construing these documents in tandem, according to Petitioner, "the supposed loans were not intended . . . to be repaid, but instead . . . forgiven over the course of the 'borrowers' continued employment." Petr.'s Opp., at 18. In support, Petitioner emphasizes that his bonus installments were paid each month, in amounts that matched the obligations which came due under the Notes. Petr.'s Opp., at 9. The "economic effect" of these transactions, Petitioner avers, equates to a "periodic and scheduled forgiveness of [his] outstanding debt." Petr.'s Opp., at 17. Thus, Petitioner contends that the Panel erred in enforcing the Notes and entering an Award against him.

At pages 12 - 13 of the May 2020 DNJ Opinion

Manifest Error of Law

As to Caputo's second-prong of appeal, he argued that:

Wells Fargo Advisors encouraged the Panel to resolve the parties' dispute based on "industry practice," instead of the applicable law. Petr.'s Opp., at 33. During the hearings, Petitioner also maintains that Wells Fargo Advisors "emphasized that it could discharge [Petitioner] at will," and claimed that a reviewing court was "not entitled to . . . substitute its judgment for that of the arbitral panel, no matter how wrong it may believe the panel's decision to be." Id. Citing Montes v. Shearson Lehman Bros., 128 F.3d 1456, 1464 (11th Cir. 1997), Petitioner contends that the representations that Wells Fargo Advisors advanced during the proceedings, in conjunction with the Award which it received, "raise[] an inference that the law was ignored." . . .  

At page 15 of the May 2020 DNJ Opinion

DNJ declined Caputo's invitation to find that the FINRA Panel acted inappropriately. The Court found that the arbitrators were not encouraged nor directed to disregard the law -- notably because the deliberations seemed derived from the terms and provisions of the Notes and the underlying contract of employment. 

Motion to Reconsider

Following DNJ's May 29, 2020, Opinion and Order, Caputo filed a Motion to Reconsider, which was largely based upon the contention that the Award was in conflict with certain public policies against the forfeiture of earned wages.  Christopher N. Caputo, Petitioner, v. Wells Fargo Advisors, LLC, Respondent (Opinion, DNJ, No.19-17204 / September 11, 2020) (the "September 2020 DNJ Opinion") 
http://brokeandbroker.com/PDF/CaputoReconOpDNJ200911.pdf As more fully characterized in the September 2020 DNJ Opinion:

[P]etitioner challenges the Court's findings and argues that his bonuses do, in fact, fall within the scope of state wage labor statutes as covered "sales commissions." Petitioner's Motion, at 1. For this reason, Petitioner contends that the Award deprived him of earned wages, and the Court erred in failing to vacate the arbitrator's decision under a de novo standard of review. 

At page 4 of the September 2020 DNJ Opinion

Although Chief Judge Wolfson showed tremendous patience in her consideration of Caputo's Motion to Reconsider, ultimately, the Judge reiterates her prior findings. Notwithstanding, Judge Wolfson afforded Caputo the remarkable judicial courtesy or re-stating -- yet again -- the substance of her determination [Ed: footnotes omitted]:

[A]s I explained in the prior opinion, Petitioner was not eligible to receive a bonus award, without having first satisfied two contractual conditions. In particular, under the terms of his contract, Petitioner had to exceed certain performance-based benchmarks. In addition, and in contrast to the cases that he relies upon in seeking reconsideration, Petitioner was required to retain his position at WFA for a particular period of time (the "Bonus Period") for his bonus to vest in full. The second condition is set forth in § 5(b) of the agreement and reads: 

Your receipt of continued payments on your Bonuses is conditioned upon your continued active employment with [WFA] and holding the functional title of Financial Advisor (or the equivalent). In the event your employment terminates for any reason . . . or if you no longer hold the functional title of Financial Advisor (or the equivalent), then you will no longer be eligible to receive any further payments on any Bonuses and you will forfeit any unpaid installments or other amounts due under the Bonuses. 

Agreement, § 5(b). 

The five bonuses that Petitioner qualified for were structured so that he would receive them on a periodic basis. Indeed, the bonuses were paid in separate installments on a once-a-month basis over the course of a specific timeframe, and the continued receipt of those installments was subject to § 5(b) of Petitioner's contract. However, as explained above, Petitioner chose to execute five loan agreements (the "Notes") that equaled each of his incentive-based bonus awards. Therefore, in practical effect, the Notes served as "compensation advances" which allowed Petitioner to obtain future installments-to which he was otherwise not entitled- in the form of an upfront immediate lump sum. . . .

At pages 7 - 8 of the September 2020 DNJ Opinion

In denying Caputo's Motion, Chief Judge Wolfson further explains that [Ed: footnotes omitted]:

[T]he arbitration award that was entered against Petitioner did nothing more than require him to return the unvested portion of his bonuses that he would not have otherwise acquired but for the execution of the Notes. Thus, the Award neither deprives nor requires Petitioner to forfeit earned wages, and its enforcement does not violate public policies under state labor laws, as I held in the prior opinion.

Moreover, Petitioner's position that § 5(b) operates as an illegal forfeiture under the NJWL has no merit. Indeed, courts in this district have enforced bargained for provisions that require workers to remain with a firm for a specific duration before a bonus accrues. . . .

At page 9 of the September 2020 DNJ Opinion

May 2022 3Cir Opinion

Following DNJ's double rebuffs, Caputo appealed to the United States Court of Appeals for the Third Circuit ("3Cir"). On appeal, Caputo argued that the FINRA Arbitration Award violated public policy and was rendered in manifest disregard of law; and, further, the FINRA Arbitration Panel exceeded its authority and excluded pertinent and material evidence. Christopher N. Caputo, Petitioner/Appellant, v. Wells Fargo Advisors, LLC Respondent/Appellee (Opinion, 3Cir, No.20-3059 / May 9, 2022) (the "3Cir Opinion") 

Attendant to Caputo's filing of his appeal to the 3Cir, the following events transpired:

Footnote 3: Caputo simultaneously moved for a stay of the District Court's judgment before the District Court, which the District Court denied. He then filed the same motion before this Court, which we also denied on October 29, 2020. That same day, Caputo filed for Chapter 7 bankruptcy in the U.S. Bankruptcy Court for the District of New Jersey ("Bankruptcy Court"). The Bankruptcy Court ultimately discharged Caputo's debts, including the approximately $1.7 million he owed to Wells Fargo under the District Court judgment, and ordered the bankruptcy case closed. 

Footnote 4: Wells Fargo asserts that the instant appeal is moot given that Caputo's debt to Wells Fargo pursuant to the District Court's judgment was discharged in bankruptcy. We disagree. Assuming that Caputo could prevail in this appeal, we could fashion "meaningful relief." See In re Surrick, 338 F.3d 224, 230 (3d Cir. 2003) (internal quotation marks omitted). A reversal of the District Court's decision and (eventual) vacatur of the arbitration award could result in Caputo receiving the money from his Wells Fargo brokerage accounts, which were placed on administrative hold after Caputo failed to pay Wells Fargo the amount he owed under the Promissory Notes. Thus, Caputo's appeal is not moot. 

at Page 5 of the 3Cir Opinion
Another Round of Dominant Public Policy

In yet another iteration before the appellate court, Caputo argued that the FINRA Arbitraton Award "should be vacated for violating dominant public policy because (1) it enforced contract provisions prohibited by state labor statutes and designed to evade taxes; and (2) Caputo was discharged without just cause." at Page 7 of the 3Cir Opinion  In a relatively terse analysis, 3Cir found in part tha Caputo's arguments had [Ed: footnotes omitted]:

improperly conflate the manifest disregard and public policy doctrines. Even if these laws articulated some public policy, it would not be "well defined [or] dominant." Caputo identifies no other explicit public policy that the arbitration award violates. 

Caputo also argues that the arbitration award is contrary to public policy because he was terminated without cause. Yet besides "general considerations of supposed public interests," Caputo does not explain how being fired without cause violates public policy. And it is hard to see how that could be true here, given that Caputo's employment was at-will. 

at Page 8 of the 3Cir Opinion

As to the conflated "manifest disregard" argument, 3Cir dismissed Caputo's contentions [Ed: footnotes omitted]:

"The manifest disregard standard requires more than legal error." "Rather, the arbitrators' decision must fly in the face of clearly established legal precedent, such as where an arbitrator appreciates the existence of a clearly governing legal principle but decides to ignore or pay no attention to it." It is an "extremely deferential" standard.  

at Page 9 of the 3Cir Opinion

Doubling back to DNJ's rationale, 3Cir reiterated that [Ed: footnotes omitted]:

Caputo also argues that the award should be vacated for exceeding the arbitrator's authority under § 10(a)(4) on the same basis. Caputo asserts that Wells Fargo invited the arbitration panel to disregard the law and that they did so, as evidenced by the panel restricting Caputo's cross-examination of certain witnesses and granting an arbitration award in favor of Wells Fargo. As the District Court recognized, "[u]nder § 10(a)(4) of the FAA, a court cannot examine the merits of an arbitrator's decision, correct factual or legal errors, or overrule an award based on a mere disagreement with the arbitrator's interpretation of a contract." Simply put, "we must enforce an arbitration award if it is based on an arguable interpretation of" the contract. The terms of an award may not be revised "unless they are completely irrational." As we have explained, "[s]o deferential is the 'irrationality' standard under the FAA that we 'may not overrule an arbitrator simply because [we] disagree . . . . [T]here must be absolutely no support at all in the record justifying the arbitrator's determinations for a court to deny enforcement of an award.'" 

Even if the FINRA arbitration panel got it wrong, it is hard to see how this would be more than legal error, as required to vacate an arbitration award under the manifest disregard doctrine. Further, despite Caputo's assertions to the contrary, there is no evidence in the record that Wells Fargo urged the FINRA arbitration panel to disregard the law. The arbitrators' decisions to cut off the cross-examination of certain witnesses and rule in favor of Wells Fargo do not support the inference that the FINRA arbitration panel disregarded the law such that they exceeded their authority. Unlike the Supreme Court's decision in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., which Caputo cites in support of his arguments, the FINRA arbitration panel did not impose its own "policy choice" in making its decision. Instead, the arbitral panel "rationally derived" the arbitration award in favor of Wells Fargo "from the agreement between the parties."

at Pages 9 - 10 of the 3Cir Opinion

Discharged Without Cause

Finally, with his appeal on life support, Caputo's remaining argument was that the FINRA arbitrators had wrongly excluded evidence of Wells Fargo's discharge of him without just cause -- it did not go down well with the Court:

We are not convinced that the arbitrators' decision to exclude evidence of Caputo's discharge deprived him of a fair hearing. Given that Caputo was an at-will employee who signed Promissory Notes promising that he would pay Wells Fargo back in full, we are skeptical that excluding the evidence at issue resulted in an unfair hearing.

at Pages 11 of the 3Cir Opinion

Accordingly, 3Cir denied Caputo's Motion to Vacate the FINRA Arbitration Award and granted Wells Fargo's Motion to Confirm the FINRA Arbitration Award.

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