by Bill Singer
FINRA Arbitration Case: The $21 Million Broker Recruiting Protocol Claim
July 26, 2010
In a Statement of Claim filed in May 2009, Claimants NRP Financial, Inc., National Retirement Partners, Inc.,and NRP Advisors, Inc. alleged:
- breach of fiduciary duty;
- breach of contract;
- promissory fraud;
- intentional misrepresentetion; and
- intentional interference with contract.
The causes of action related to the Stock Purchase Agreement, Transition Agreement, Secured Promissory Note, and Security Agreement entered into on December 5, 2008. Claimants alleged that as part of the December 5, 2008, stock buy-back transaction, the parties entered into a Transition Agreement providing for
- the orderly transition of Respondent Walker Bafs Retirement Group, Inc. (WBRG) to Respondent Wade Alan Walker (Walker) and Respondent Jeffrey Brian Bats (Bars) from NRP;
- payment of the Secured Promissory Note from the Applicable Earnings of WBRG; and
- certain payments to be made by NRP during the Transition Period as defined in the Transition Agreement.
In the Matter of the Arbitration Between NRP Financial, Inc., National Retirement Partners, Inc.,and NRP Advisors, Inc., Claimants, vs. Walker Bafs Retirement Group, Inc., Wade Alan Walker, and Jeffrey Brian Bafs, Respondents (FINRA Arbitration 09-03246, July 20, 2010)
A Painful Transition
Claimants alleged that Walker and Bafs materially breached the Transition Agreement by performing financial services to their clients outside WBRG entity, and through other retirement plan broker-dealers (including, but without limitation, LPL Financial Corporation) that offer competing services and products to those of Claimants.
Claimants alleged that Walker and Bafs
- solicited and knowingly interfered with business relationships between Claimants and their clients;
- committed several other acts in material breach of the Transition Agreement; and
- essentially stripped WBRG of ite assets and left it as an undercapitalized and empty corporate shell that is unable to pay the NRP Secured Promissory Note or function as a profitable business.
The $21 Million Counterclaim
Respondents generally denied the allegations, asserted numerous affirmative defenses, and counterclaimed for $21,119,000 in compensatory damages. Respondents alleged in their Counterclaim that Claimants had engaged in fraudulent and negligent acts in order to induce Walker and Bafs to contemplate transferring with their clients to NRP. Respondents alleged that NRP falsely misrepresented to Walker and Bafs during their recruiting efforts that the firm was a Broker Recruiting Protocol signatory, which would have pemiitted Walker and Bafs to move freely to NRP and take with them the client information necessary to transition their pension clients to NRP.
Respondents further alleged that NRP prematurely announced that Walker and Bafs were leaving Merrill Lynch before the parties had actually reached terms for the move or signed the necessary agreements, and before Walker and Bafs had notified Merrill Lynch of their intentions.
Respondents alleged that as a result of NRP's negligence, Merrill Lynch terminated Walker and Bafs, and then had them barred by court order from contacting their citents for nearly five months. Combined with the fact that NRP was not a signatory to the Broker Recruiting Protocol, NRP's premature disclosure devastated Respondents' client base, forcing them to leave behind nearly the entire client base at Merrill Lynch.
Respondents alleged that Claimants' business model was an abject failure leading to massive unrecouped costs and liquidity problems. Respondents alleged that they were set up for failure when NRP made it impossible for them to bring their clients to the firm, and then ensured failure by refusing to support Respondents' practice due to Claimants' own financial liquidity issues. Respondents asserted that the sum goal and result of Claimants' outrageous conduct was to terminate Walker and Bafs, but keep their clients and the revenue and profits they would generate for the firm.
Claimants generally denied the allegations in the Counterclaim and asserted numerous affirmative defenses.
Change of Venue
Starting in June 2009, Claimants sought to change the venue of the arbitration from Indianapolis, Indiana to Los Angeles, California. On December 31, 2009, Claimants filed a Complaint in Los Angeles Superior Court seeking a preliminary and permanent injunction seeking to bar FINRA from proceeding with the scheduled May 2010 arbitration and compelling the the transfer of the arbitration to Los Angeles. In February 2010, the Court denied Claimants' motion and dismissed the action. The FINRA Panel subsequently awarded attorneys' fees pursuant to Indiana Law IC-34-52-1-1 pursuant to a finding that the Claimants' claim was frivolous unreasonable, groundless, and made in bad faith.
The Panel Rules
At the conclusion of the hearings, the FINRA Arbitration Panel made the following rulings:
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Denied and dismissed with prejudice all of Claimants; claims;
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Claimants' are jointly and severally liable for and shall pay to
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Respondent Walker $500,000 in compensatory damages,
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Respondent Bafs
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$1,000,000 in compensatory damages, and
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$1,359.93 in costs incurred to attend California hearing,
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Respondents Walker and Bafs
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$420,472.00 and $30, 646.33 in attorneys fees pursuant to Indiana Law IC-34-52-1-1,
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$10,313.67 in expert witness fees,
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$24,472.61 and $6,747.74 costs related to the California litigation,
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$6,310.92 in costs for document copying and electronic processing of data, and
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$9,510.00 in court reporter costs.
Regulatory lawyer Bill Singer has analyzed and posted the latest crop of FINRA disciplinary cases.