An irreverent Wall Street Blog
FINRA Arbitrators Deal With Vague And Ambiguous Employment Agreements
April 1, 2016
Well-drafted contracts and agreements are
useful as a sword or a shield, depending upon which party is seeking the
protection of the terms. When documents say what they mean and mean what they
say, all sorts of relationships move forward on firmer ground, and all sorts of
relationships may be terminated with more confidence as to what's fair and
appropriate. Unfortunately, too much of the paperwork that has made its way
into our daily dealings has been cut-and-pasted into endless versions and revisions
without anyone actually reading the resulting monstrosity and asking just what
the hell does it all mean. In two Wall Street employment disputes that resulted
in FINRA arbitrations, we see how ambiguous and vague language becomes the
proverbial monkey-wrench in the machinery.
Case In Point
In a Financial Industry
Regulatory Authority ("FINRA") Arbitration Statement of Claim filed
in July 2014, former Raymond James Financial Services, Inc. ("RJFS") registered
representative Claimant Dyer asserted breaches of contract and fiduciary duty;
constructive fraud; conversion; unfair and deceptive trade practice;,
misappropriation of trade secrets; tortious interference with contract, and
violations of FINRA Rules. In the Matter of the FINRA Arbitration
Between Charles E. Dyer, Sr., Claimant, vs. Kirk E. Smith ,
James G. Brown, and Raymond James Financial Services, Inc., Respondents (FINRA Arbitration 14-02268, March 9,
2016).
FA Agreement
Claimant Dyer alleged that
around June 23, 2008, he, Respondent Brown, and Respondent RJFS entered into
a Financial Advisor Agreement ("FA Agreement"),
which, among other terms, required at least 30-days prior written of any
termination by either party.
Brown and Smith Employment
Contract
Around October 22,
2011, Claimant Dyer and Respondent Smith entered into an employment contract
("Employment Contract") pursuant to which Respondent Smith had agreed
to work exclusively with Claimant Dyer.
Take A
Hike
On October 7 2013, Respondent
Brown allegedly telephoned Claimant Dyer to inform him of
his immediate termination as an RJFS financial advisor. Claimant Dyer asserts
that Respondent Brown's telephone call terminating him was not preceded by the
requisite 30-days-prior-written-notice and, as such, breached the FA
Agreement. Further, Claimant Dyer alleges that with Respondent
Brown's knowledge and consent, Respondent Smith began contacting Claimant's
clients and suggested that they remain at RJFS after Claimant's departure and
allow either Respondent Brown and/or Respondent Smith to serve as their new
financial advisors.
Damages
Sought
By the close of the FINRA
Arbitration hearing, Claimant Dyer sought $421,531.00 in compensatory damages
plus $500,000 punitive damages; $1 million "Treble Damages", attorneys's fee,
and costs.
Respondents generally denied the
allegations and asserted various affirmative
defenses.
The Panel adjourned the hearing
on December 16, 2015, due to the hospitalization
of
Respondent Smith.
Award
The FINRA Arbitration Panel
found the following Respondents liable to and ordered them to pay to Claimant
Dyer:
- Respondent Smith: $20,000 compensatory damages for breaches of the Employment Contract and fiduciary duty; and
- Respondent RJFS: $180,000.00 in compensatory damages for breach of the FA Agreement and $90,000 in attorneys's fees.
Required 30-Business
Days Notice
In offering the rationale for
imposing damages upon Respondent RJFS under the breach of the FA
Agreement, the Panel explained that [Ed: underlining in
original]:
Bill Singer's CommentConsidering the issues*, the testimony, and documentary evidence, the ambiguous termination section (§3) of the Dyer-RJFS FA Agreement only permitted parties (Dyer and RJFS) to terminate it. Under subsection (c), Brown could instruct RJFS to do so., but RJFS had to determine whether the termination was "for cause" under subsection (b) with no prior notice or for other reasons under subsection (a), as in this case, which subsection required Dyer to be given 30 business-days prior notice of termination, which requirement RJFS employees discussed. RJFS materially breached Dyer's FA Agreement by failing to give him the required prior notice thereby preventing Dyer from conducting and/or selling his on-going profitable business.*Indemnity obligations (if any) were not issues within the scope of this arbitration.
Compliments to this
FINRA Arbitration Panel for setting forth the facts and providing us with
insight into their deliberations.
Claimant Dyer
argued that the FA Agreement gave the power of
termination only to its signatories: Dyer and RJFS.
Consequently, Dyer could quit or RJFS could fire him but nowhere was there a
provision for Respondent Brown to fire Dyer under the FA
Agreement. In light of the fact that the arbitrators appear to have
found that, in fact, Brown fired Dyer, now what? Note that the FINRA Arbitration Panel
made a pointed, barbed reference to the FA Agreement's
"ambiguous termination section." Ambiguous ain't a
great word to be reading when you're the party who drafted the agreement and
you are attempting to benefit from whatever protection you thought that
agreement gave you.
The FINRA
Arbitration Panel appears to have concluded that under the terms of the FA Agreement, a "for cause" termination could be
undertaken immediately and did not require the 30-days prior written notice to
Dyer. As
explained in the arbitrators's analysis, however, even if Respondent Brown had
believed that Claimant Dyer had engaged in some conduct that rose to the level
of warranting a "for cause"
termination, the FA Agreement provided that only
RJFS could go through the mechanics of deciding whether the termination was "for cause."
Alas, RJFS and Brown got a problem -- and one of their own
making given the "ambiguous" nature of the FA
Agreement's "termination" provisions. The arbitrators
appear to have found that Brown determined that Dyer had engaged in conduct
that rose to the level of "for cause" misconduct. Brown, however, was
not a signatory to the FA Agreement, which vested the
mechanics of finding "for cause" solely with RJFS. Under that set of
facts, the arbitrators found that Dyer was entitled to 30-day prior written
notice of his termination. Given the arbitrators's
decision, we must infer that they found that RJFS didn't live up to its
contractual obligations and breached the agreement by ceding the "for
cause" analysis and determination to Brown.
Notwithstanding Respondent
Brown's involvement in this employment dispute, he wasn't ordered to pay any damages
and emerged unscathed. Respondent Smith got hit with $20,000 in compensatory
damages for breaching his contract with Claimant Dyer; and Respondent RJFS was
ordered to fork over $270,000 in damages and fees for its breach of the FA
Agreement with Dyer.
You might think that given the
high-stakes world of Wall Street and the prevalence of industry lawyers and
massive contracts with pages of small print that these types of drafting snafus
aren't so common. Fact is, this isn't that unusual a problem. Trust me, I've
been reading industry agreements and contract for over three decades and I
can't tell you how often I've laughed at some absurd paragraph or tried to
chart out an impossible provision that was circular in its logic and absolutely
immune to any effort to decipher the obligations set
forth.
By way of another example,
consider In the Matter of
the Arbitration Between Reliastar Life Insurance Company and Voya America
Equities, Inc., Claimants, vs. James William Boldischar, Respondent
(FINRA Arbitration 14-03384, August 12, 2015), where a FINRA Arbitration Panel
found that Respondent Boldischar was required to repay commissions to Claimants
Reliastar and Voya pursuant to the terms of Sales Incentive
Plans ("SIPs"). In offering its rationale, the Boldischar
Panel explained, in
part:
The cancellation of policies by the insured customers during the first year resulted in reversals and chargebacks of commissions paid. To rule otherwise would mean that Respondent, as he argued, could sell policies that were later cancelled with no earnings to the issuer, yet be paid large commissions, even though the issuer received no benefit, and retain those commissions if he quit the employment. There would be no problem if that were the actual deal, but it was not. The chargebacks were understood by both parties to reverse the previously paid commissions. Only when it became time to pay did Respondent discover some vague language in the SIPs that might benefit him. This language in the SIPs merely said that certain other payments due to Respondent would be cancelled, but there was no limiting the payment obligation to only those amounts.
The drafting of the SIPs could have been clearer, thus we are requiring that the Reliastar pay 25% of the FINRA fees and costs . .
Although
the Panel was not convinced that Respondent Boldischar acted in good-faith in
refusing to repay, the arbitrators also expressed their chagrin that Reliastar
and/or Voya had drafted a somewhat vague legal agreement (which, but for the
sloppiness, maybe the parties and the arbitrators wouldn't have had to convene
a hearing). The cost of that chagrin was an order to pay 25% of the FINRA fees
and costs of the proceeding (presumably in lieu of placing the full burden on
Respondent).
In Boldischar
we have a somewhat unsympathetic respondent. Imagine, however, that the
Reliastar/Voya employee was not someone in receipt of re-payable commissions
but, to the contrary, someone from whom the firm was seeking fees or expenses. For example, imagine
that some young industry newbie joins his or her first member firm and is
presented with a mass of paperwork as part of the pre-hire and new-hire
package. I've seen the nonsense and I"m sure that you have too: an
overwhelming array of contracts, agreements, policies, and incentive plans --
all of which the kid is told must be quickly signed and initialed in countless
places. And, of course, the message, the gist, the pressure is to do it here
and now: ya really need to take it home and have some lawyer look it
over? Of course,
somewhere, buried amid dozens or hundreds of paragraphs, is some warning that
an "early departure" from the firm will result in an obligation to
pay so-called "Estimated Costs." Ah yes, estimated costs. I always love that
proposition.
And what about that poor kid
that was dazzled by the promises of a gateway to Wall Street? If the kid doesn't produce, the firm kicks him to the curb. If the kid feels he was lied to and misled about the
real nature of his job and quits, the former firm demands immediate repayment
of the Estimated Expenses. Amazingly, the
demanded repayment is to-the-penny of what was previously set forth as merely
"Estimated."
I've seen
everything including the kitchen sink tossed under the heading of Estimated
Expenses. There is crap like "Desk Fee" or "Initiation
Costs" or "Training Costs" or "Onboard Fee." I see
most of those charges as shameful attempts to squeeze a few bucks out of the
unwashed and the uninitiated. Every so often, however, one of these kids
refuses to roll over and play dead and asks the firm to provide documentation
showing that the "estimated" fees and costs were actually incurred. Oh my, ask for
proof of estimated charges and all of a sudden that elicits threats of
collection efforts and lawsuits.