Deferred Compensation Case Meanders to FINRA Arbitration to Federal Court to State Court to Dumpster

October 19, 2022

Few things inflame the passions on Wall Street more than deferred compensation. Parties often disagree whether deferred comp disputes are subject to mandatory FINRA intra-industry arbitration or can be diverted to a non-FINRA arbitration forum or have to be litigated in a federal court or a state court. Without question, this is a quagmire created by the broker-dealers in order to make it all that more painful and costly for reps to move to another firm; as evidenced by the layers of entities involved in employing the rep versus those issuing an employee-forgivable-loan/promissory note versus those handling the deferred comp plan. Recently, a messy lawsuit highlights many of the issues.

2019 FINRA Arbitration Award

In a FINRA Statement of Claim filed in January 2015, associated person Claimants asserted breach of contract, violation of New York Labor Law, defamation, slander, hostile work environment, discrimination, and retaliation. At the hearing, Claimant Goldstein requested compensatory damages in the range of $2,800,000.00 to $9,888,818.00 and Claimant O'Malley requested compensatory damages in the range of $2,800,000.00 to $8,447,000.00. Respondents BGC Financial and Scotto generally denied the allegations and asserted various affirmative defenses.
In the Matter of the Arbitration Between Jennifer Goldstein and Kevin O'Malley, Claimants, v. BGC Financial, L.P. and Louis Scotto, Respondents (FINRA Arbitration Decision 15-00142 / March 13, 2019)

 The FINRA Arbitration Decision states that:

Before and during hearings, Respondents asserted that any claims regarding deferred compensation must be brought against BGC Holdings, L.P., an entity that was not named and is not a FINRA registered entity that was subject to jurisdiction in this arbitration. Accordingly, the Panel has made no decision regarding deferred compensation claims against BGC Holdings, L.P.

The FINRA Arbitration Panel denied Claimants' claims against Respondent Scotto.

After eight pre-hearing sessions with a single arbitrator, four pre-hearing sessions with the FINRA Arbitration Panel; and 42 hearing sessions, the FINRA Arbitration Panel found Respondent BGC liable and ordered the firm to pay to:

  • Claimant Goldstein: $475,000.00 in compensatory damages representing $175,000.00 for the claim of hostile work environment and $300,000.00 on the claim of retaliation; 

  • Claimant O'Malley: $300,000.00 in compensatory damages on the claim of retaliation; and

  • Claimants Goldstein and O'Malley: $8,008.03 in costs; $475,194.50 in attorneys' fees; and $750.00 reimbursement for FINRA filing fee. 
So . . . why the hell are we talking about Claimants Goldstein and O'Malley's 2019 FINRA Arbitration Award in October 2022? Great question -- clearly, you're one of the sharper tacks in the box!

2020 Federal Court -- Wrong Courthouse Steps

On September 4, 2020, Goldstein and O'Malley filed a Complaint in the United States District Court for the District of Delaware ("D. Del"). Jennifer Goldstein and Kevin O'Malley, Plaintiffs, v. BGC Holdings, L.P.; BGC GP, LLC; BGC Financial, L.P.; and BGC Partners, Inc., Defendants (Order, D. Del.; No. 20-CV-01193 / August 11, 2021) (the "DDel Order")
By way of background not provided in the FINRA Arbitration Award, the DDel Order states in part that:

Plaintiffs are Jennifer Goldstein and Kevin O'Malley, both of whom were employed by one of Defendants-BGC Financial, L.P.-from 2010 to June 2015, originally hired as "Co-Managers of the ABS Group within the mortgage backed securities department." (D.I. 1, ¶ 16). The Complaint paints a picture of abusive and unlawful working conditions. (Id. at 7-8). Plaintiffs began FINRA arbitration proceedings against BGC Financial on January 16, 2015. (Id  40). Plaintiffs were subsequently terminated from their employment around June 2015. (Id  41 ). Plaintiffs then raised additional claims in the arbitration. Plaintiffs won an award of about $1,250,000 in the arbitration.1 
= = = = =
Footnote 1: Defendants represent that they have paid the award. (D.I. 15 at 7). 

at Page 1 of the DDel Order

As to the nature of the claims before federal court, the Order asserts that:

The gist of the present Complaint is Plaintiffs' claim that they were enrolled in a deferred compensation program that permitted Plaintiffs to become limited partners in BGC Holdings and that they earned and have vested rights in two classes of partnership units, which they call "Signon Partnership" Units and "Newton Partnership" Units. (D.I. 1 at 4-7). Plaintiffs would have an option to convert these partnership units into common stock of BGC Partners. (Id. at 4-5). Plaintiffs made a "conversion request" in 2016, but BGC Partners refused the request about October 27, 2016, because Plaintiffs had "engaged in protected activities." (D.I. 1,146; see D.I. 11-1, Ex. B). 

Plaintiffs seek damages arising from the refusal to redeem limited partnership interests in BGC Holdings. (D.I. 1, 11). 

. . .

On September 4, 2020, Plaintiffs filed this lawsuit. Plaintiffs assert five state law claims and one federal claim for Title VII retaliation. On the basis of the Title VII claim, Plaintiffs allege federal question jurisdiction. (D.I. 1 ¶ 12). All the state law claims relate to breach of the partnership agreement, including a request for declaratory relief, an injunction, two breach of contract claims, and breach of fiduciary duty claim. Plaintiffs allege supplemental jurisdiction over the state law claims, and further allege that there is diversity of citizenship jurisdiction. 

The Title VII retaliation is alleged against Plaintiffs' former employer, BGC Financial, and also against BGC Holdings and BGC Partners. Plaintiffs state that BGC Financial is an alter ego and/or mere instrumentality of BGC Partners and BGC Holdings because (i) each of these qualify as affiliates of each other, as that term is defined in 17 CFR § 230.405, and as affiliates share an interrelationship of operations; (ii) are under common management by BGC Partners; (iii) are under common ownership and/or financial control of BGC Partners; and (iv) are under centralized control of BGC Partners. (D.I. 1, 124). Thus, Plaintiffs state that BGC Partners and BGC Financial may be held liable for the retaliatory conduct BGC Financial engaged in. (Id.) Plaintiffs further argue that all conditions for redemption of the Partnership Units have been met and Defendants' refusal to redeem the Partnership Units has been undertaken as retaliation for Plaintiffs' protected activities. (Id. ¶ ¶ 125-27). 

at Pages 2 - 3 of the DDel Order

Going Down for the Count

Notwithstanding that the Complaint alleged six Counts, DDel only addressed the viability of Plaintiffs' Count VI: Title VII of the Civil Rights Act of 1964. In response to Defendants' Motions to Dismiss, the Court found that Count VI was barred by the statute of limitations. In framing the timeliness of the filings, the Court set the dueling arguments as follows [Ed: footnote omitted]:

In their brief, Plaintiffs argue that Count VI is timely, because: (1) Defendants have waived any objection to timeliness, because Defendants did not raise it in the FINRA arbitration; (2) the statute of limitations should be equitably tolled; and (3) a retaliation occurred on July 10, 2019 when Plaintiffs' "demand letters gave rise to an entirely new claim of retaliation." (D.I. 13 at 12-14; see D.I. 14-1, Exs. 11 & 12). 

at Page 4 of the DDel Order

[D]efendants argue that the retaliation claim thus existed in 2016, and the statute of limitations runs from then. Defendants essentially point out that it would make little sense to say that Plaintiffs could restart the limitations period by periodically making the same request over and over again. . . .

at Page 7 of the DDel Order

Lookin' for the Employer (and ONLY the Employer)

D. Del agreed with Defendant' argument and deemed that the retaliation claim based on failure to redeem accrued in 2016; and that the 2019 demand letter did not restart the statute of limitations. Further, the Court explains in part that:

Only BGC Financial is alleged to be an employer in the Complaint. Are the other two Defendants employers? The Court of Appeals has stated that a party has a sufficient "employment relationship" to be an employer based "on the level of control the defendants exerted over the plaintiff: which entity paid the employees' salaries, hired and fired them, and had control over their daily employment activities." Covington v. Int'! Ass'n of Approved Basketball Offs., 710 F.3d 114, 119 (3d Cir. 2013) (cleaned up). Plaintiffs allege the various Defendants have overlapping employees and have actual authority to act for multiple Defendants. (D.I. 1 at 20; see D.I. 13 at 17). This does not make them all Plaintiffs' employer. The allegations in the complaint are insufficient to show an employment relationship with anyone other than BGC Financial. 

Thus, were I not finding Count VI to be barred by the statute of limitations, I would nevertheless dismiss Count VI against BGC Financial, BGC Holdings and BGC Partners, for failure to state a claim, albeit with leave to amend.5 

= = = = =

Footnote 5:  I note that the result here does not strike me as harsh or unjust. The essence of Plaintiffs' claims is the breach of contract claim. Defendants do not dispute that there were contracts with certain terms. Defendants do raise various objections to the main breach of contract claim, including, in the motion to dismiss, briefing on the statute of limitations, issue and claim preclusion, the statute of frauds and the integration clause. I express no opinion on any of the defenses, but Plaintiffs' claim that their contractual rights have not been honored is the heart of their case. 

at Pages 9 - 10 of the DDel Order

Accordingly, D. Del: 

  • dismissed with prejudice Count VI/Title VII Claim as barred by the statute of limitations; and 
  • dismissed without prejudice Count VI/Title VII Claim for failure to state a claim:
    (1) for all named Defendants as to causation, and
    (2) for BGC Holdings and BGC Partners as to not being employers
  • dismissed without prejudice to refile the balance of the Motion to Dismiss for the remaining five state law claims should the Court determine that it has diversity jurisdiction over the five claims.
2022 Superior Court/Delaware Opinion

Having been rebuffed in federal court, Plaintiffs filed a Complaint on December 9, 2021, in: Jennifer Goldstein and Kevin O'Malley, Plaintiffs, v. BGC Holdings, L.P.; BGC GP, LLC; BGC Financial, L.P.; and BGC Partners, Inc., Defendants (Opinion, Superior Court of the State of Delaware, No. N21C-12-069 / October 12, 2022)

In their State Court action, Plaintiffs asserted:

i. declaratory judgment against all Defendants (Count I); 
ii. breach of contract against the Partnership (Count II); 
iii. breach of the covenant of good faith and fair dealing against the Partnership (Count III); 
iv. breach of fiduciary duty against the General Partner (Count IV); 
v. civil conspiracy against BGC Financial, the General Partner, and the Partnership (Count V); 
vi. aiding and abetting against BGC Financial, the General Partner, and the Partnership (Count VI); and 
vii. breach of contract against all Defendants (Count VII).

Defendants filed a Motion to Dismiss in response to the State Court claims.

A Matter for Chancery

Initially, the State Court determined that it lacked subject matter jurisdiction over Count IV/Breach of Fiduciary Duty, and, accordingly, dismissed that allegation and directed the Plaintiffs to the Court of Chancery, which purportedly has exclusive jurisdiction over the charge.

Time And Tide

As to the remaining six Counts, the State Court made quick work of dismissing them:

Plaintiffs' claims accrued in October 2016 at the latest, when Plaintiffs allege Defendants wrongfully refused to redeem Plaintiffs' Partnership Units. Plaintiffs did not file their complaint in the District of Delaware until September 2020. Thus, even if the Court determined that Plaintiffs' claims were subject to a three-year statute of limitations, Plaintiffs' action is still time-barred. 

ii. No tolling exception applies 

No tolling exception applies. At the latest, Plaintiffs' claim expired in October 2019. Neither the FINRA arbitration nor any other circumstances warrant tolling the statute of limitations. The extraordinary circumstances discussed in IAC/InterActiveCorp. V. O'Brien19 and Levey v. Brownstone Asset Management, LP, 20 cited by Plaintiffs, are not present here.21

= = = = =

Footnote 19: 26 A.3d 174 (Del. 2011). In IAC, the Supreme Court of Delaware considered the following factors as "unusual conditions or extraordinary circumstances:" (1) whether the plaintiff had been pursuing his or her claim, through litigation or otherwise, before the statute of limitations expired; (2) whether the delay in filing suit was attributable to a material and unforeseeable change in the parties' personal or financial circumstances; (3) whether the delay in filing suit was attributable to a legal determination in another jurisdiction; (4) the extent to which the defendant was aware of, or participated in, any prior proceedings; and (5) whether, at the time this litigation was filed, there was a bona fide dispute as to the validity of the claim. IAC, 26 A.3d at 178. 

Footnote 20: 76 A.3d 764 (Del. 2013). 

Footnote 21: In this action, unlike in Levey, nothing prevented Plaintiffs from filing a lawsuit against the Partnership in Delaware while the FINRA arbitration was pending. There is no dispute that the Partnership was not a party to the FINRA arbitration, is not a FINRA member, and is not subject to FINRA's jurisdiction. As such, the Partnership would be greatly prejudiced if Plaintiffs were permitted to pursue their untimely lawsuit against the Partnership.

at Pages 8 - 9 of the State Court Opinion

As such, the State Court granted Defendants' Motion to Dismiss. 

Bill Singer's Comment

All of which comes off like a game of Three Card Monte. We got one employer. We got two non-employers. Stand back kid. Hey, if you ain't got money down on the table step away. Here's the Employer. It's the Red Queen. Now she's here. Now she's there. Now she's not here. Now she's not there. A shuffle here. A little razzle dazzle there. Point to the little lady and pick a winner. Don't pick a Joker. Sorry . . . wrong card. You lose. Wanna play again?