September 6, 2023
When you took your last industry job, you got a nice employee forgivable loan in the form of a promissory note. You thought you'd be there for the term of the loan. It didn't work out that way. Now your former firm wants a few hundred thousand dollars in principal repaid. You don't want to repay. Or you'd like to repay but can't. Or you're not repaying a damn cent and for good reason. So, you didn't repay what was demanded and just received a FINRA Arbitration Statement of Claim. What's it all gonna cost ya if you lose? Probably a lot more than you think.
Case in Point
In a FINRA Arbitration Statement of Claim filed in November 2021 and as amended, FINRA member firm Claimant Ameriprise Financial Service, Inc. asserted breach of promissory note and unjust enrichment. In the Matter of the FINRA Arbitration Between:Ameriprise Financial Services, Inc., Claimant, v. Jeffrey Stephen McHale, Respondent (FINRA Arbitration Award 21-02855) https://www.finra.org/sites/default/files/aao_documents/21-02855.pdf
$750,076.59 Principal Owed
As asserted in the FINRA Arbitration Award:
In the Statement of Claim, as amended, Claimant requested: $750,076.59, being the principal owed as of September 20, 2021; attorneys’ fees, including costs, filing fees, forum fees, and hearing deposits; pre-award interest of 20% on the Note balance from September 20, 2021 through the entry of the award; post-award interest of 20% starting 30 days from date of award until paid; permanent injunctive relief directing Respondent to make a legally enforceable request to any new or subsequent employer to disgorge any bonuses to Claimant in order to repay all amounts owed to it by Respondent; and for such other and further relief as deemed just and appropriate.
. . .
At the hearing, Claimant requested total damages in the amount of $777,883.76 for the principal and interest as of August 15, 2023.
Associated person Respondent McHale generally denied the allegations and asserted affirmative defenses.
Discovery Sanctions
The sole FINRA Arbitrator granted Claimant's Motion for Discovery Sanctions by Order dated April 25, 2023, and. accordingly, prohibited Respondent McHale from producing any of the documents requested and not previously produced on Claimant’s Motion to Compel and denied the Motion for Sanctions in all other respects.
Award
The FINRA Arbitrator found Respondent liable and ordered him to pay to Claimant Ameriprise
- $777,883.76 in compensatory damages;
- $329.61 in daily interest from August 16, 2023, until the Award is fully satisfied;
- $2,022.13 in costs;
- $122,916.31 in attorneys' fees; and
- $1,350 in FINRA filing fees.
In addition to the above damages, costs, and fees, Respondent McHale was assessed $225 in postponement fees, $200 in discovery-related-motion-fees, and $1,800 in hearing fees.
Bill Singer's Comment
Online FINRA BrokerCheck disclosures as of September 5, 2023, assert that McHale was first registered in 1997 and was registered with Ameriprise from February 2015 to October 2021. Under the heading "Employment Separation After Allegations," BrokerCheck alleges that on September 20, 2021, Ameriprise "discharged" McHale based upon allegations that:
Registered Representative was terminated for violation of company policy related to code of conduct, personal trade and ethics, and conducting securities business with a U.S. citizen living abroad.
Frankly, there's nothing particularly interesting or compelling about Ameriprise v. McHale -- it appears to be yet another promissory note case. In this iteration, the former employer sought $777,883.76 in allegedly owed principal and interest and the FINRA Arbitrator awarded the firm with the damages sought plus $329.61 in interest. As close to a slam dunk as Ameriprise could have hoped for.
When confronted with repayment of a promissory note upon the termination of employment (either by discharge or resignation), some reps just never figured that they would leave the employer and assumed that the term for forgiveness would run its course, and, hey, the hell with 'em -- I made a lot of money during the three or four years that I was there and if I left a couple of years early, screw 'em! In other cases, money needed to repay the loan was lost gambling or on bad investments; in other cases, family emergencies pushed the rep into insolvency; and in other cases, well, y'know, life just happens.
Depending upon which tale of woe is presented, a lawyer may counsel a client to declare bankruptcy (assuming no fraud was involved) but admonish that this option triggers a regulatory disclosure. Moreover, in response to the filing for bankruptcy, an employer may terminate the employee (rightfully or not). Further, the mere fact of a bankruptcy may make getting that next job all the more difficult, if not next to impossible. Finally, future clients may not be enamored with giving their life savings to someone who went bankrupt. So, you're telling me that I either repay what I can afford, incur the cost of a litigation that I probably won't win, or file for bankruptcy and upend my career?
An alternative to bankruptcy is often trying to settle with the former employer by noting that it's an either/or proposition: Either give me a few years to pay off a percentage of what I owe; or, in the alternative, I'll file for bankruptcy and you'll get nothing. Sometimes that works but more often than note it doesn't. If the former employee gave his manager the finger on the way out the door and shared a few choice expletives, that may have poisoned the well beyond repair. Then there's the leverage that the former employer has by jamming up a departed rep via a Form U5 disclosure (warranted or not) and filing a FINRA Arbitration Statement of Claim.
in parsing through their options, some reps simply try to play for time, avoid filing for bankruptcy, and extend settlement negotiations long enough to scrape together the shortfall of cash that exists now but may not exist in a few months or a couple of years. As such, a lawyer is often asked how long the arbitration thing could be dragged out and delayed. The response often starts with "depends" and includes an admonition about "good faith" and "sanctions." A veteran arbitration lawyer will admonish someone hoping to game the system until the 11th hour that playing chicken with your former employer may leave you on the hook for arbitration-related costs, fees, and expenses even if things don't progress to an opening statement. There's also the warning that once you set the arbitration process in motion that there's no guarantee that when the 11th hour arrives, you will be able to stop the lawsuit via a last-minute settlement. At some point, that same conversation gets around to the likely costs of defending against the former employer's arbitration claims and the dollar amount of the initial Retainer for the lawyer's services.
Turning to Ameriprise v. McHale, we have a graphic example of what happens when a rep climbs into the FINRA arbitration ring and loses a promissory note fight.
First, in November 2021 when Ameriprise filed the FINRA Arbitration Statement of Claim, the principal owed on the Note was about $750,076.59 -- but McHale may simply lacked the funds to repay that amount.
Second, McHale may have refused to repay any amount for whatever reason he may have had; and, as such, the case was headed for a hearing no matter what.
Third, McHale may have asked how long the lawyer could legitimately drag things on and, as now evidenced by the actual record, we see that the Award was signed by the FINRA Arbitrator on August 29, 2023, so that's about 21 or so months from the filing of the claims.
Whatever McHale's strategy or circumstances, he now stands at a cash register that is ringing up the true "costs" of fighting the good fight. We start with the charge of $777,883.76 for nothing more than "compensatory" damages. That sum apparently includes the Principal amount of $750,076.59 plus accrued interest of $27,807.17. So, for starters, the initial cost of not paying the Principal as of September 2021, was about $28,000 in additional compensation awarded by the Arbitrator. Making matters worse for McHale, he's now slammed with $329.61 in DAILY interest costs starting on August 16, 2023. For a 30-day month, that's adding up to $9,888.30 per month. Ouch!!!
The awarded "costs" for taking the hearing to verdict was $2,022.13. On top of that, there was $1,350 in reimbursed FINRA filing fees. The most painful add-on is $128,916.31 in attorneys' fees. If you just add those three items, McHale's bill for arguing his case before a FINRA arbitrator was $132,288.44 -- and that's not including the $329.61 a day in accruing interest. Absent the daily interest, McHale was hit with a nearly 18% surcharge above and beyond the $750,076.59 in Note Principal.
But that's not all the hidden charges. FINRA assessed about $2,225 in postponement/discovery/hearing fees. Also, McHale had to hire his own lawyer. We don't know the cost of that legal counsel -- could be more or less than what Ameriprise's counsel charge. Just for argument's sake, let's pretend the McHale spent $100,000 in legal fees for his own lawyer over the 21 months involved from the filing of the Complaint to the issuance of the Award. As such, that $132,288.44 increases to $234,513.44 but we'll round it down to just $230,000. The all-in costs of about $230,000 means that not paying up in September 2021, came with a roughly 30% surcharge in September 2023 amounting to a total bill of about $975,000 inclusive of costs, fees, expenses, and both parties' legal fees but exclusive of about $330 a day in mounting interest.
Without question, for some associated persons, delaying things for just under two years may be a worthwhile trade-off if the extra cost is 30%. For other associated persons, they may simply have bought time to stay in the industry. Regardless, after losing an arbitration, the clock starts ticking for FINRA to move to suspend/bar you for nonpayment -- consider the guidance at "Failure to Pay an Award or Settlement" at https://www.finra.org/arbitration-mediation/decision-award, which states in part that:
Under FINRA rules, industry parties must pay arbitration awards within 30 days or risk suspension by FINRA. Specifically, FINRA Rule 9554 contains expedited suspension procedures that address a brokerage firm's or broker's failure to pay FINRA arbitration awards. FINRA can suspend or cancel the registration of a broker or brokerage firm if that party does not comply with an arbitration award or settlement related to an arbitration or mediation.
However, a brokerage firm or broker may assert four defenses to the expedited suspension process:
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- the brokerage firm or broker paid the award in full;
- the parties have agreed to installment payments or have otherwise settled the matter;
- the brokerage firm or broker has filed a timely motion to vacate or modify the award and such motion has not been denied; and
- the brokerage firm or broker has filed a petition in bankruptcy and the bankruptcy proceeding is pending or the award has been discharged by the bankruptcy court.
