Thar Be Monsters -- FINRA Raiding Case Ends With Odd Ruling

January 26, 2011

Things are tough on Wall Street these days, even with a recovering economy. Stockbrokers lost a lot of customers during the Great Recession and they're not all coming back - many investors have decided that they can just as easily lose their own money and have decided to trade online.  On top of that, many stockbrokers simply gave up and left the industry for other occupations.

Consequently, there's a volatile mixture in the biz of fewer customers, fewer veteran brokers, and not a whole lot of eager-beaver young bloods looking to begin a not-so fabulous career of endless cold calling.  That places a premium on the old-hands with a book of actively traded accounts or impressive assets under management.

The trouble with premiums is that they quickly become bounties.  Given the cost of planting, watering, and growing a stockbroker, it's often cheaper just to pay an experienced producer with a book of business to join your firm. Sure, it's gonna cost you - an up-front bonus, higher pay-out, a bunch of perks - but there are only so many customers and so few brokers and, hey, this is big business and no one has the time to sit around and play games.  Ante up or give someone else your seat.

Pirates of Wall Street

All of which leads us to what in Wall Street jargon is called a "raid,"  the equivalent of a pirate ship boarding a merchant vessel and taking away the cargo, the damsels, and sailors.  On Wall Street, the cargo is the top producers, the best sales assistants, and a smattering of savvy back-office types. Sometimes the buccaneers strip a branch office down to the walls; other times, they just cherry-pick the best and brightest.  These days, it seems that most of Wall StreView Detailset's brokerage firms are flying the Jolly Roger, which sort of makes it hard to tell the good guys from the bad guys, assuming that there are any good guys still afloat on the high seas.

Given that Wall Street is often about cut-throat and backstabbing competition, it's ironic when brokerage firms complain that a competitor or former employee has "stolen" their employees.  For an industry that worships at the altar of supply-and-demand, it would seem that attracting and retaining staff is simply a function of market forces.  Not all that different from the free agent market in professional sports.  Ya win some. Ya lose some.

The tension in the system is between the rights of all employees to work where they deem best and the rights of employers to be protected against unfair competition (particularly when such unfair conduct involves tortious interference with confidential information, trade secrets, or customers).  Traditionally, the first line of defense against unwanted boarding has been to require written employment agreements that contain non-compete and/or non-solicitation provisions.  However, not all industry employees are subject to such agreements.

In recent years (and cyclically with Wall Street's ebbs and flows of fortune), brokerage firms have failed, have merged into other firms, have laid off thousands of employees, and generally forced their crews to walk the plank when financial conditions dictated.  As such, the sanctity of employee "loyalty" to a Wall Street employer has taken quite a beating during the Great Recession. There are only so many shipmates that the Captain can bury after they've dug the secret hiding place for his treasure chest.  At some point, word gets around the decks.  Accordingly, it doesn't take too many shots across the bow these days to motivate large numbers of traders, brokers, and support staff to jump ship.  A rumor here.  A whisper there. A bonus to tip the scales. Yo, ho, ho and a bottle of rum.

Ahoy Matey!

In a Financial Industry Regulatory Authority (FINRA) Arbitration Statement of Claim filed in December 2008 and seeking at least $250,000 in damages, Claimant Fox & Company alleged that Respondent Shryack and Respondent Gundy conspired to raid and/or take the entire representative force of Claimant Fox & Co.'s Dallas branch office to Respondent Milkie/Ferguson Investments. As a result of such allegedly dastardly conduct, Claimant sought to recover its lost revenue, which it deemed to be substantial.  

In furtherance of its arbitration claims, Claimant Fox & Co. asserted causes of action including breach of contract; interference with contracts, and raiding. Respondents generally denied the allegations and asserted various affirmative defenses. In the Matter of the Arbitration Between Fox & Company Investments, Inc., Claimants, vs. Milkie/Ferguson Investments, Inc., John Edward Shryack, and Steven Alan Gundy, Respondents (FINRA Arbitration 08-05026, January 20, 2011).

Walking the Plank

The FINRA Arbitration Decision in Fox & Company v. Milkie/Ferguson et al. is an odd one.  If it was to be noted on an old nautical map, the description would read: Thar be monsters. 

On the one hand, the FINRA Arbitration Panel found for Claimant Fox & Co. The Panel found Respondents Shryack and Gundy jointly/severally liable and ordered them to pay Claimant Fox $60,000 in compensatory damages plus $10,000 in attorneys' fees.

That $70,000 is quite a treasure chest; but, hold on, Claimant Fox should not have divided that haul among the crew.  There were three Respondents named by Claimant, but the FINRA Arbitration Panel only granted victory against two of them.

On the other hand, the FINRA Arbitration Panel dismissed Claimant Fox's claims against Respondent Milkie/Ferguson Investments, Inc.. Worse, the Panel found that Claimant filed a frivolous claim against Respondent Milkie/Ferguson and Claimant was ordered to pay to that Respondent $10,000 in attorneys' fees. 

Arrrrrrrrr, give Captain Milkie/Ferguson ten thousand for his trouble and lower him over the side with a provisioned boat and safe passage. Arrrrrrrrr.  Now, how are we goin' to divide $60,000 among the seven of us? That's 60 divided by 7, that's, what, 8 and then you carry 4 and then you divide that by . . . Arrrrrrrrr, you there, grab a shovel and come with me -- we have a treasure chest to bury.

For additional discussions about recent Wall Street raiding cases: