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FINRA Arbitration Award Limits Social Media Liking and Linking
January 18, 2022
In a sign of the times, a recent FINRA dispute between two former associated persons prompted a Stipulated Award. In furtherance of the parties' settlement, the Respondent was directed to immediately delink, unfriend, or disconnect from any connection with any Restricted Client on any social media platform, and to remain delinked, unfriended or disconnected for about a year. Additionally, Respondent was enjoined from communicating with, contacting, responding, "liking," "linking," commenting, giving a "thumbs up," reacting, or accepting any invitation to connect or communicate with any Restricted Client on any social media platform for about a year. All of which comes off as a modern-day Wall Street version of a time-out. Is this a wave of things to come? Who knows -- but now that it's out there, the genie is out of the bottle.
Case in Point
In a FINRA Arbitration Statement of Claim filed in February 2021 and as amended, associated person Claimant Heller asserted breach of contract; tortious interference with existing business relations; misappropriation of trade secrets; unfair competition; defamation; and injunctive relief.
In the Matter of the Arbitration Between Robert Michael Heller, Claimant, v. William Joseph Pfeifer, III, Respondent (FINRA Arbitration Award 21-00268)
https://www.finra.org/sites/default/files/aao_documents/21-00268.pdf
As set forth in Claimant Heller's Amended Statement of Claim, he sought:
1. Compensatory damages of at least $330,000.00 with the exact amount to be determined at hearing;2. Punitive damages as the Panel deems appropriate;3. Compensatory damages totaling at least $5,000.00 with the exact amount to be determined at hearing, and such other relief as the Panel deems appropriate pursuant to 18 U.S.C. § 1030(g) as a result of Respondent's violation of the CFAA;4. Amendment to the permanent injunction already issued by the Panel as necessary to address Respondent's continuing misconduct and to tailor the injunctive relief as discovery continues in this matter;5. Forum fees and costs be assessed against Respondent;6. Attorneys' fees;7. FINRA filing fees;8. Expert fees;9. All other costs incurred by Claimant in connection with this arbitration matter as expressly required under the parties' contract; and10. Such further award for Claimant as the Panel determines is just and equitable based on the evidence.
Counterclaim
Associated person Respondent Pfeifer generally denied the allegations, asserted affirmative defenses, and filed a Counterclaim asserting breach of contracts; tortious interference with existing business relationships, and injunctive relief.
Stipulated Award
There was a lot of back-and-forth and dueling motions between the parties; and, ultimately, in December 2021, the parties filed a Motion for Entry of a Stipulated Award, which the FINRA Arbitration Panel granted. As set out in the FINRA Arbitration Award, the Stipulated Award implemented the following:
1. For purposes of this Order, "Restricted Clients" means all clients of Claimant or of Heller Financial Services as of the November 13, 2020 Closing Date of the Practice Acquisition Agreement executed by Claimant and Respondent except for the Restricted Clients that previously transferred to Respondent prior to the entry of this Order, which Respondent has represented and warranted are solely those that have been expressly identified on Exhibit A to the Parties' Memorandum of Understanding entered into on October 20, 2021.2. Respondent is hereby enjoined from, whether directly or indirectly, contacting or attempting to contact (whether for social purposes or otherwise), soliciting or attempting to solicit, attempting to do business with, or accepting business of any kind from any Restricted Client whether acting on his own behalf, or on behalf of any other person or entity, through and including November 22, 2023.3. Respondent and anyone acting in concert with him, including but not limited to any agent, officer, employee or representative of Respondent, are hereby enjoined from using or disclosing in any way information that was contained in the records of Claimant or Heller Financial Services regarding any of the Restricted Clients including but not limited to, the names, addresses and confidential financial information of those customers.4. Respondent is hereby directed to immediately delink, unfriend or disconnect from any connection with any Restricted Client on Linkedln or Facebook or any other social media platform, and remain delinked, unfriended or disconnected until December 20, 2023. Respondent is hereby enjoined from communicating with, contacting, responding, "liking," "linking," commenting, giving a "thumbs up," reacting, or accepting any invitation to connect or communicate with any Restricted Client on Facebook or any other social media platform, including but not limited to LinkedIn, Facebook, Twitter, Instagram, or other new or existing platform, and in any way or manner, through December 20, 2023. Notwithstanding the foregoing, where Respondent cannot control in advance if a Restricted Client starts following him because no invitation acceptance is needed, such as in Instagram, Respondent is hereby directed to block any Restricted Client that follows him on any such platforms as soon as Respondent is aware of the Restricted Client following him.5. In the event any Restricted Client with whom Respondent initiated contact after November 13, 2020 contacts Respondent and inquires about transferring their accounts to Respondent, Respondent agrees to only state the following: "Will Pfeifer and Rob Heller have mutually agreed to amicably end our working relationship. As such, Will is no longer affiliated with Heller Financial Services. Rob has assumed the sole responsibility of servicing the clients of Heller Financial." Respondent shall thereafter immediately refer that client to Claimant for handling with no further contact, including no mention or discussion of Respondent's competing business, his services, his staff, or anything bearing on his occupation or livelihood. Respondent is further ordered to provide immediate notice to Claimant, within twenty-hour (24) hours, of all such inquiries.6. In the event any Restricted Client transfers to Respondent or GoldBook Financial or any other firm to which Respondent moves, where Respondent assisted in any way with the transfer, or if Respondent in any way receives remuneration, or promises of future remuneration, as a result of such client's transfer, even if the client is serviced by a different advisor, at any time through and including November 22, 2023, it is hereby ordered that Respondent shall pay to Claimant or such other individual(s) or entity that is designated by Claimant, four times (4x) the annual fees paid by each such Restricted Client to Mass Mutual during the prior twelve (12) months that the client was at Claimant, which the Parties agrees are a genuine pre-estimate of damages and not a penalty. The payment is hereby ordered to be paid by wire transfer to Claimant within ten (10) days of the Restricted Client transferring their account(s).7. The Panel will retain jurisdiction over this matter through the term of the Injunction for any purpose that may be necessary or appropriate to implement or enforce the Injunction, including, without limitation, through future orders or proceedings for civil or criminal contempt. If Respondent violates any of the terms of this Award and Stipulated Permanent Injunction, Respondent shall pay Claimant's attorneys' fees, expenses and costs incurred in connection therewith, with further equitable and injunctive relief as appropriate.8. Any and all claims for relief not specifically addressed herein, including any requests for punitive damages, are denied.
Bill Singer's Comment
I often urge clients contemplating a new business or an affiliation agreement to first consider what I call the "Dreaded Ds," which are Death, Disability, Disqualification and Divorce:
- What if you or your business partner drops dead -- did you arrange for Key Man or life insurance?
- What if your partner is hospitalized and won't be able to get back to work for a month or for several months or will be rendered permanently disabled -- do you have to continue to pay your partner a full draw or salary -- and what if the tables are turned? What happens if the continuation of the business is solely or largely dependent upon you?
- If you work on Wall Street and you are suspended or barred, what happens with the biz if you are temporarily or permanently disqualified? What if your partner says you have to cash out?
- If your marriage falls apart, will your spouse be entitled to a share of the business pursuant to a divorce decree; and how's that gonna work out if the former spouse wants to come into the office but that prompts open warfare on the premises?
- Did you draw up a Shareholder Agreement / Buy-Sell Agreement -- If not, how the hell do you think you're going to deal with the Dreaded Ds?
If you're exploring some affiliation arrangement, imagine that your relationship with your future partner explodes into a disaster. No question is more basic than: How are you going to divide up the roster of clients? For some industry folks, that discussion starts with an agreement that we each get to keep so-called "F&F": friends and family accounts. Okay, that's often a given but make sure that you define what constitutes a friend (and what happens with so-called "mutual" friends) and consider the definition of "family" (as that term changes with social trends). You may find that it's also a good idea to create a monthly, updated roster of clients in which you allocate accounts into batches of what would be yours and what would be mine. Without question, spend time on the formula whereby you will divide all the other clients should things fall apart. There are tons of approaches that may work. On the other hand, always remember that notwithstanding what associated persons work out between them, such a resolution may not pass muster with an employer firm and may not be in keeping with a client's preference. Consequently, should such considerations interfere with you best laid plans, it might also make sense to come up with a "what if" savings clause.
On display in Heller v. Pfeifer is Social Media in all its dis-glory. Note the Stipulated Award's references to "delink, unfriend, or disconnect . . . on LinkedIn or Facebook or any other social media platform.. ." Who knew, even a few years ago, that any of this would be a concern for Wall Street professionals? Well it is, so don't make light about it. Among some of the edgier aspects of the Stipulated Award is this:
Notwithstanding the foregoing, where Respondent cannot control in advance if a Restricted Client starts following him because no invitation acceptance is needed, such as in Instagram, Respondent is hereby directed to block any Restricted Client that follows him on any such platforms as soon as Respondent is aware of the Restricted Client following him.
Not sure that I'm in love with the wording of that provision. For example, what's meant by "cannot control in advance?" And who gets to say? Also, what's exactly meant by blocking someone online, and how does that interpretation come into play should a social media site not use the term "Block" -- and what happens if social media evolves to a point where the term "Block" falls out of fashion. Finally, what is the ramification of this directed-to-block policy on a third-party-customer, who may not like the fact that their online freedom is being negotiated away by other individuals?
The whole Paragraph 5 compromise is lovely but it certainly raises some potential compliance/regulatory issues. If, in fact, the working relationship between Pfeifer and Heller did not "amicably end" (which you would sort of think is evidenced by the lawsuit), then how would an industry regulator view an agreement to misinform public customers of such a fact? I'm also left a bit uneasy by this language:
Respondent shall thereafter immediately refer that client to Claimant for handling with no further contact, including no mention or discussion of Respondent's competing business, his services, his staff, or anything bearing on his occupation or livelihood. Respondent is further ordered to provide immediate notice to Claimant, within twenty-hour (24) hours, of all such inquiries.
If a Restricted Client contacts Respondent, first they're going to be told that Pfeifer and Heller parted amicably and that Pfeifer is no longer affiliated with Heller Financial Services. The next step is for Respondent Pfeifer to immediately refer the client to Claimant Heller. But what happens if the Restricted Client doesn't want to speak to Rob Heller, or doesn't want to stay with Heller Financial Services, or simply prefers to open an account with Pfeifer's new firm? I'm not quite clear that this is fully addressed, and I'm not sure that it is in the public's best interest to have such intrigue embedded into the new account process.
Finally, we got this tricky bit of language:
In the event any Restricted Client transfers to Respondent or GoldBook Financial or any other firm to which Respondent moves, where Respondent assisted in any way with the transfer, or if Respondent in any way receives remuneration, or promises of future remuneration, as a result of such client's transfer, even if the client is serviced by a different advisor, at any time through and including November 22, 2023, it is hereby ordered that Respondent shall pay to Claimant or such other individual(s) or entity that is designated by Claimant, four times (4x) the annual fees paid by each such Restricted Client to Mass Mutual during the prior twelve (12) months that the client was at Claimant, which the Parties agrees are a genuine pre-estimate of damages and not a penalty. The payment is hereby ordered to be paid by wire transfer to Claimant within ten (10) days of the Restricted Client transferring their account(s).
Lemme see if I got this right. A public customer opts to close out her Heller Financial Services account and transfer the proceeds to wherever Pfeifer lands -- or, in the alternative, the client decides to keep an account with Heller Financial Services but also open a second account at Pfeifer's new firm. Does the above cited paragraph cover "second" or multiple accounts? Then there's the whole thing about imposing upon Pfeifer a quadruple annual fee on a trailing 12-month basis. Will that somewhat punitive arrangement be disclosed to the clients? Have the parties created a non-disclosed conflict that a reasonable investor might want to know about?