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FINRA Arbitrators Hold That Discharged Employee Of Brokerage Firm Need Not Pay The Firm $75,000 Due Under Promissory Note

  • By: David Rich
  • Published: February 7, 2011

In Wells Fargo Investments v. Shaffer, FINRA Arbitration No. 10-00773 (Jan. 18, 2011), claimant/counter-respondent Wells Fargo Investments, LLC (“Wells Fargo,” the “brokerage firm,” or the “firm”) had made to respondent/counter-claimant Kenneth C. Shaffer (“Mr. Shaffer,” the “respondent employee,” or the “employee”) a forgivable loan when he began employment with the brokerage firm. In January 2008, the respondent employee had signed a promissory note apparently stating that if Wells Fargo terminated the employee’s employment within a specified period for any reason, the balance due on the forgivable loan would immediately become payable to the brokerage firm. In or around October 2009, Wells Fargo had fired the respondent employee, and had demanded immediate payment of the $74,617 principal balance due under the promissory note.

On January 18, 2011, after a two-day hearing, an arbitration panel of the Financial Industry Regulatory Authority, Inc. (“FINRA”), sitting in San Francisco, California, found that the promissory note signed by the respondent employee was “both procedurally and substantively unconscionable.” Wells Fargo Investments v. Shaffer, FINRA Arbitration No. 10-00773 (Jan. 18, 2011). As a result, the Shaffer arbitration panel held, the promissory note was unenforceable. Accordingly, the Shaffer arbitration award denied in their entirety Wells Fargo’s claims against the respondent employee for the $74,617 principal balance due under the promissory note and for interest, costs, and attorneys’ fees.

In holding that the promissory note signed by the respondent employee, and payable to the brokerage firm, was unconscionable and thus unenforceable, the Shaffer award relied on Armendariz v. Foundation Health Psychcare, 6 P.3d 669, 24 Cal. 4th 83, 99 Cal. Rptr.2d 745 (Cal. 2000). In Armendariz, a discriminatory discharge lawsuit, the Supreme Court of California found unconscionable, and refused to enforce, mandatory employment arbitration agreements — that is, agreements to arbitrate wrongful termination or employment discrimination claims rather than filing suit in court, which the defendant employer imposed on the plaintiff employees as a condition of employment — because the agreements unilaterally prohibited the employees from recovering front pay, punitive damages, or attorneys’ fees in arbitration.

The Shaffer arbitration panel further held that Wells Fargo was liable to the respondent employee for $75,000 for defaming the employee by stating on his Form U-5 (Uniform Termination Notice for Securities Industry Registration), in essence, that the brokerage firm had fired the employee for good cause. Specifically, the Shaffer panel held that the brokerage firm had libeled the respondent employee by stating on his Form U-5, which the firm filed with securities regulators, that the firm discharged the respondent employee for the following reasons:

“Violation of company policies: 1) Representative lacked justification for charging equity securities markup that exceeded the firm’s full service equity schedule; and 2) Representative received a written customer complaint and did not forward to supervisory principal.”

In addition to awarding, to the respondent employee, compensatory damages of $75,000 against the brokerage firm for defamation, the Shaffer arbitration award ordered that the above-quoted statement of reasons(s) be expunged from the respondent employee’s Uniform Termination Notice, and that the expunged language be replaced with “Violation of company policies regarding intra-company e-mails.”

Wells Fargo’s defeat in the Shaffer arbitration was all the more ignominious given that Mr. Shaffer represented himself in the arbitration.

Promissory Note Disputes

The dispute involved in Shaffer — about “transitional compensation” payments to a broker whom the firm has fired within a predetermined period of time — is the type of dispute most frequently arbitrated before FINRA between brokerage firms and brokers. These disputes are termed promissory note, recruiting bonus, up-front bonus, or forgivable loan cases.

In the securities industry, brokerage firms often offer account executives transitional compensation to facilitate the account executives’ lateral moves to those firms. A firm’s reasons for offering such compensation are to persuade the account executive to join the firm and to make certain that the executive won’t receive a windfall if he or she leaves the new firm soon after arriving. Consequently, the up-front bonus or forgivable loan provision of a broker’s employment agreement usually provides that if the firm fires the broker within a specified period for any reason, or if the broker voluntarily leaves the firm, the balance due on the loan immediately becomes payable to the firm.

If the terminated broker does not immediately repay the loan, the brokerage firm may bring a FINRA arbitration against the broker to collect the amount outstanding. In such a situation, the terminated broker should retain skillful counsel to negotiate with the brokerage firm and/or to vigorously defend the broker in any promissory note arbitration.

If you are a securities industry professional residing in the Manhattan area, and the brokerage firm which formerly employed you demands that you repay monies owed under a promissory note, call Attorney David S. Rich at (347) 970-5550.

David Rich, Esq.

David Rich David S. Rich is the founding member of the Law Offices of David S. Rich, LLC,
a Manhattan Employment and Business Litigation Law Firm, in New
York City and in Englewood Cliffs, New Jersey...View Profile