Wedbush Ordered to Pay Attorneys Fees After Untimely Payment of Attorneys Fees

June 28, 2016

If you read through today's FINRA arbitration commentary by Bill Singer, you will come across what seems a fairly mundane employment dispute between former employee Bell and his former employer Wedbush, with Bell seeking at least $1.25 million in damages. As is often the case, the FINRA Arbitration Decision is minimalist in its presentation of the underlying dispute; and about all we know is that the Claimant asserts that he sustained damages as a result of various breaches and a wrongful discharge. At the end of today's blog is a Postscript, which may open your eyes and drop your jaw when you realize that there was far more to this employment dispute than was presented in the Decision.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in October 2014, former employee Claimant Bell asserted, in part,  breaches of oral and written contract and constructive discharge in connection with his employment and compensation by his former employer, Respondent Wedbush. In addition to attorneys' fees, costs, interest, and punitive damages, Claimant sought at least $1.25 million in compensatory damages of which allegedly unpaid salary, wages, and benefits" composed a portion. In the Matter of the FINRA Arbitration Between Jeffrey M. Bell, Claimant, vs. Wedbush Securities Inc. Respondent (FINRA Arbitration 14-03238, June 14, 2016).

Respondent Wedbush generally denied the allegations and asserted various affirmative defenses.

Award

The FINRA Arbitration Panel found  Respondent Wedbush liable and ordered it to pay to Claimant $37,500.00 in attorneys' fees.

In rendering the FINRA Arbitration Decision, the  arbitrators offered this explanation:

Incentive Program Claims:

Considering the facts and the laws presented under a preponderance of evidence standard, the Panel finds that the "Division Incentive Pool" and the "Unallocated Executive Incentive Pool" were discretionary as to what amount Respondent would pay to Claimant. Although Respondent transferred money to the incentive pools based on profitability, there was no evidence other than Claimant's testimony that Respondent promised orally or in writing to pay Claimant all money transferred into the incentive accounts. There was no formal incentive pay policy in any employee handbook; whereas the handbook expressly stated incentive pay was discretionary. Claimant did not have a formal, signed employment contract guaranteeing incentive pay based on profitability. No other employee testified that Claimant was guaranteed incentive pay based on profitability. To the contrary, the evidence demonstrated that just because money was placed into the incentive pool accounts that was not a guarantee of payment or entitlement to payment. Instead, any payments to Claimant from those pools were at the sole discretion of Respondent.

Claimant testified that a memorandum Respondent sent in 2009 was a contractual agreement by Respondent to give incentive pay based on profitability; and, once the money was put in the pool, Claimant was entitled to the payments. Claimant, however, admitted that he believed Respondent had discretion as to "when" to pay Claimant the money. The memorandum Claimant asserts is a contract does not mention the discretionary nature of the program, which begs the question: "where did Claimant's understanding that there was some discretionary element to the program come from?" There is no evidence to support Claimant's understanding, as every document that mentions the discretionary nature of the incentive program does not qualify that discretion.

Claimant further asserted that said memorandum was confirming the terms of the incentive pay that were in place from 2007 - 2009. As of around December 2010, however, there was approximately $264,000.00 in the Division Incentive Pool (which accumulated sometime between 2007-2010), so the course of dealings evidences that the full amount transferred to the incentive pool was not being paid out to Claimant. Further, Claimant's testimony is outweighed by the fact that other witnesses testified that Respondent's incentive program was discretionary and that the course of dealings was consistent with the incentive program being discretionary, without qualification. Several documents evidence both that Respondent disclosed the discretionary nature of the incentive program and that Claimant understood the discretionary nature of the incentive program, without qualification. While the Panel found both Edward Wedbush and Claimant less than credible in certain aspects of their testimony, the preponderance of the evidence demonstrated that the incentive program was discretionary. The use of profitability was just a starting point for how much money Respondent might consider paying out, versus a guarantee of how much would be paid.

Respondent presented case law that holds a bonus or incentive program will be upheld by the terms of the program, unless those terms are otherwise unlawful. Claimant did not present law to suggest that a discretionary incentive program, as present in this case, is unlawful under California law. Thus, the Panel cannot hold as a matter of law or equity that the discretionary nature of the incentive programs at issue here was unlawful, as Respondent was following the designated terms of the program.

Based on the above-findings, the remaining issues regarding the incentive program are rendered moot; and, the Panel finds Claimant is not owed any money from the "Division Incentive Pool" or the "Unallocated Executive Incentive Pool."

Failure to reimburse attorneys' fees expended:

The Panel finds under California Labor Code §2802 that Respondent failed to timely reimburse Claimant attorneys' fees that Claimant had to pay relative to his employment duties working for Respondent. Although Respondent reimbursed Claimant the amounts due after the Statement of Claim was filed, Respondent is liable for Claimant's attorneys' fees in having to pursue reimbursement of said business expenses.

Claimant waived any rights or claims under California Labor Code §203 during the hearing of this matter.

Claimant did not introduce an accounting of the number of hours his counsel expended pursuant to this issue, so by law the Panel may assign a number and hourly rate it deems reasonable. To that end, the Panel awards Claimant $37,500.00 in attorneys' fees relative to this issue.

Bill Singer's Comment

It seems that the arbitrators shot down Bell's request for compensatory damages on the finding that the funds in dispute were not contractually payable to Bell and, in part, represented discretionary obligations of Wedbush (and the firm decided not to make those payments to Bell). The arbitrators did, however, award $37,500 in attorneys' fee to Bell.

Incentive Program Claims

A frequent source of dispute between employees and employers (which often transitions to former employees and former employers) is so-called discretionary versus non-discretionary compensation. In Bell v. Wedbush, for example, Claimant Bell appears to have contended that once Respondent Wedbush had transferred money to the incentive pools based on profitability, that such an act produced a non-discretionary employer's obligation to pay all such transferred funds. Th
e FINRA Arbitration Panel did not find the existence of such a policy in any employee handbook; to the contrary, the employee handbook "expressly stated incentive pay was discretionary. Moreover, the Panel placed weight on the absence of a formal, signed employment contract guaranteeing incentive pay based on profitability.  The Panel rejected Claimant's contention that various memoranda constituted a contract obligating Respondent to pay profitability-based incentives once the incentive pool was funded.  As succinctly noted:

While the Panel found both Edward Wedbush and Claimant less than credible in certain aspects of their testimony, the preponderance of the evidence demonstrated that the incentive program was discretionary. The use of profitability was just a starting point for how much money Respondent might consider paying out, versus a guarantee of how much would be paid.

Failure to reimburse attorneys' fees expended

I'm sure that many of you may have missed the nuance in the Panel's award of $37,500 in attorneys' fees to Claimant. That monetary award was not to reimburse Bell for attorneys' fee that were apparently incurred by him in some matter for which the Decision provides no facts. Here's what the Panel said but you might have missed:

[A]lthough Respondent reimbursed Claimant the amounts due after the Statement of Claim was filed, Respondent is liable for Claimant's attorneys' fees in having to pursue reimbursement of said business expenses.

Wedbush did, in fact, reimburse Bell for his attorneys' fee but that the payment was made to the employee only after he had filed the FINRA Arbitration Statement of Claim and only after he apparently had retained a lawyer to pursue Wedbush for its untimely reimbursement.  Although Wedbush appears to have fully reimbursed Bell for the previously incurred attorneys' fee, there was an additional legal bill for the costs of attempting to force the former employer to render the reimbursement on a timely basis. It is that latter bill for attorneys' fee to compel timely reimbursement of the earlier bill that the Panel ordered paid.

As to the legal basis for the $37,500 award of attorneys' fee, the Panel explained that its award was consistent with the requirements of California Labor Code §2802 because Respondent had failed to timely reimburse Claimant attorneys' fees incurred per his Wedbush-employment duties. 

SIDE BARCalifornia Labor Code Section 2802.
  
(a) An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful.
(b) All awards made by a court or by the Division of Labor Standards Enforcement for reimbursement of necessary expenditures under this section shall carry interest at the same rate as judgments in civil actions. Interest shall accrue from the date on which the employee incurred the necessary expenditure or loss.
(c) For purposes of this section, the term "necessary expenditures or losses" shall include all reasonable costs, including, but not limited to, attorney's fees incurred by the employee enforcing the rights granted by this section.
(d) In addition to recovery of penalties under this section in a court action or proceedings pursuant to Section 98, the commissioner may issue a citation against an employer or other person acting on behalf of the employer who violates reimbursement obligations for an amount determined to be due to an employee under this section. The procedures for issuing, contesting, and enforcing judgments for citations or civil penalties issued by the commissioner shall be the same as those set forth in Section 1197.1. Amounts recovered pursuant to this section shall be paid to the affected employee.

As the arbitrators explained, notwithstanding that Wedbush ultimately reimbursed Bell that payment occurred only after the FINRA Arbitration Statement of Claim was filed.  In determining the appropriate amount of attorneys' fees to be reimbursed, the Panel provided us with this guidance:

by law the Panel may assign a number and hourly rate it deems reasonable. To that end, the Panel awards Claimant $37,500.00 in attorneys' fees relative to this issue.

Postscript

BrokeAndBroker.com Blog readers are familiar with my tirades against FINRA's arbitration forum for what I frequently characterize as a lack of "content and context" in FINRA Arbitration Decisions. There are many industry participants who disagree with my view and argue that given the private nature of arbitration that the parties should have the right to impose confidentiality upon the proceedings. To some extent, I concur -- provided that all parties request such confidentiality or that in the absence of unanimity a Panel votes to impose confidentiality. On the other hand, given the public nature of court proceedings and the bar to the courthouse imposed by FINRA (and, I also argue, at the behest of its large member firms), there is something offensive to allowing a self-regulated industry to compel both customers of its member firms and the employees of its member firms to arbitrate in a a forum that has the appearance of being financed and/or controlled by FINRA's member firms.

By way of an example of what I would deem as important and relevant "content and context" that was not referenced in any manner in the FINRA Arbitration Decision is this information, which I provide in full-text from a November 20, 2014, Securities and Exchange Commission Press Release:


FOR IMMEDIATE RELEASE
2014-263

Washington D.C., Nov. 20, 2014 - The Securities and Exchange Commission today announced that Los Angeles-based broker-dealer Wedbush Securities agreed to settle a pending SEC case for market access violations by admitting wrongdoing, paying a $2.44 million penalty, and retaining an independent consultant.

The SEC's order finds that Wedbush violated the market access rule by failing to have adequate risk controls in place before providing customers with access to the market, including some customer firms with thousands of essentially anonymous overseas traders.  The order also finds that Wedbush committed other violations in connection with its market access business.

"Wedbush acknowledges that it granted access to thousands of overseas traders without having appropriate safeguards in place," said Andrew J. Ceresney, Director of the SEC Enforcement Division.  "Broker-dealers who enjoy the benefits of being registered must honor the responsibilities that come with that status, and we will continue to hold responsible those who provide market access without implementing proper risk controls."

Wedbush's former executive vice president Jeffrey Bell and senior vice president Christina Fillhart also agreed to settle the charges against them for causing Wedbush's violations of the market access rule.  Without admitting or denying the SEC's findings, they agreed to pay a combined total of more than $85,000 in disgorgement, prejudgment interest, and penalties.

The Enforcement Division's litigation was led by John Yun and Aaron Arnzen of the San Francisco Regional Office and Steven Buchholz of the Market Abuse Unit and San Francisco office.  The case was supervised by Daniel Hawke and Robert Cohen, Chief and Co-Deputy Chief of the Market Abuse Unit, and Jina Choi, Director of the San Francisco office.