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Former Rep Sues for Compensation After Involuntary Termination
October 23, 2023
A recent FINRA Arbitration presents the somewhat odd scenario of an associated person Claimant suing an associated person Respondent for unpaid commissions and fees. Typically, in a case involving unpaid compensation, you'd expect to see the former rep suing the former brokerage but not in this lawsuit. After you read the Award, you're sort of left wondering whether the Claimant did himself any favors in filing his claims.
Case in Point
In a FINRA Arbitration Statement of Claim filed in August 2022, associated person Claimant Test representing himself pro se, asserted specific performance; wrongful withholding of compensation; wrongful conversion of Claimant’s compensation to pay other representatives; violation of Texas labor and wage laws; violation of federal labor and wage laws; illegal forfeiture of vested compensation; illegal forfeiture of earned commissions; illegal forfeiture of unvested compensation; failure to timely pay wages upon termination and waiting time penalties; breach of the duty of good faith and fair dealing; fraud and fraudulent inducement; misrepresentation; negligent misrepresentation; quantum meruit and unjust enrichment; promissory estoppel; breach of fiduciary duty; conversion; and breach of contract. In the Matter of the Arbitration Between David B. Test, Claimant, v. Charles Tait Cruse, Respondent (FINRA Arbitration Award 22-01881) https://www.finra.org/sites/default/files/aao_documents/22-01881.pdf
As to the source of Claimant Test's testinees, the Award asserts in part that:
The causes of action relate to Claimant’s allegation that Respondent failed to pay him commissions and/or advisor fees which were due to Claimant.
Okay, now that puts things into context. None of us like getting jerked around when it comes to getting paid for our efforts.
The Award asserts that Claimant Test sought in excess of $50,000 inclusive of unpaid compensation, commissions, attorneys' fees, and interest. Moreover, Claimant sought $100,000 in punitive damages; and he also sought consequential, mental anguish, and emotional distress damages. At the hearing, Claimant Test sought $34,454.54 in compensatory damages plus non-economic damages, punitive/statutory damages, and attorneys' fees.
Associated persons Respondent Cruse (represented by legal counsel) generally denied the allegations and asserted affirmative defenses.
The Order of Abatement
In January 2023, Respondent Cruse filed a Motion to Abate or Dismiss for Failure to Join Necessary Parties; and, in response, the FINRA Arbitration Panel issued an Order on January 31, 2023, that memorialized this ruling:
The Arbitration will be abated for 30 days in order for Claimant to submit a sworn stipulation (the language to be approved by Respondent's attorney) that he does not, nor will he ever have, any claim against any person or entity (including the Northwestern [Mutual] entities listed the Transition Agreement) other than Charles Tait Cruse in connection with the allegations made in this Arbitration. Once the Sworn Stipulation is filed with FINRA, a prehearing scheduling conference will be scheduled and the Abatement will be lifted.
In February, Claimant Test filed a Sworn Statement that apparently fully complied with the required stipulation in the January 31st Order.
From 15 to 1 Cause of Action
Prior to the Final FINRA Arbitration Hearing, Claimant Test abandoned 14 of his 15 causes of action and proceeded solely on the basis of the alleged breach of contract.
Award
The FINRA Arbitration Panel denied Claimant Test's claims. In an Explained Decision, the Panel noted in part that:
The crux of Claimant’s breach of contract claim relates to the amount of $34,454.54 Claimant sought to recover pursuant to the CAG Advisor Transition Agreement. This amount represents claimed compensation that Claimant asserts should have been paid to him relating to payments that he asserts were due to him after his involuntary termination.
Any right of post-termination compensation depends upon the condition precedent that the termination was voluntary. Also, under the terms of the PCG agreement, Claimant was required to provide at least fifty (50), and not more than seventy-five (75), calendar days advance written notice of his intent to voluntarily terminate his relationship with Northwestern Mutual (“Northwestern”). During his testimony, Claimant acknowledged that his termination from Northwestern was not voluntary. Also, he acknowledged that he did not provide the requisite notice.
Claimant also asserts that he is entitled to post-termination compensation in accordance with the 22One Advisors Ensemble Agreement. The 22One Ensemble Agreement relates to a group of Northwestern representatives that made an agreement to pool their resources and receive a set percentage of compensation that was paid by Northwestern to the 22One Group. In accordance with the 22One Ensemble Agreement, after his termination, Claimant asserted that he was entitled to compensation from 22One Advisors. That dispute was resolved by the remaining owners of 22One buying Claimant’s interest and receiving a release as to any and all claims, including any right to compensation.
As a result, Claimant did not establish any breach of contract by virtue of the PCG Agreement or the 22One Ensemble Agreement. Claimant did not introduce any evidence of any other agreement by which he would be entitled to recover damages relating to breach of contract.
Testimony was given relating to what Claimant claims to be delay in processing his claim for post-termination compensation and delay in returning his laptop. He also complains that Northwestern inhibited his ability to move his own personal office furniture from the office building.
It is apparent that Northwestern was dilatory in returning the laptop. Claimant abandoned that cause of action prior to the final hearing. Also, he did not present any evidence of damage that was a proximate cause of the delay in the return of the laptop.
Claimant sought the recovery of attorney’s fees that he incurred in connection with the work of an attorney in writing a demand letter concerning this matter. Since Claimant has not established a basis for recovering attorneys’ fees, they were not awarded. Furthermore, Claimant did not present any testimony from an attorney/expert who could provide evidence that the attorneys’ fees were reasonable and necessary. Therefore, the claim for attorneys’ fees is denied.
Since Claimant did not establish, by a preponderance of the evidence, that Respondent liable for breach of contract and, because Claimant did not establish a basis for recovery of attorneys’ fees, nor did he present evidence of attorneys’ fees that could support an Award, the Panel is of the opinion that Claimant is not entitled to any recovery in this case.
Bill Singer's Comment
First and foremost, a round of applause for this FINRA Arbitration Panel because of that very thoughtful and comprehensive rationale.
After removing the 14 abandoned claims, Claimant Test's dispute seems to largely focus on his contention that notwithstanding the involuntary nature of his termination, he was owed $34,454.54 under the CAG Advisor Transition Agreement. The Panel found that Claimant failed to prove Respondent's liability for the breach of contract claim and, accordingly, denied any recovery.
BrokerCheck Disclosures
Although the FINRA Arbitration Award does not set out the specifics of Claimant Test's involuntary termination, we can find that background in FINRA's online BrokerCheck disclosures as of October 23, 2023, and discover that on July 27, 2021, Northwestern Mutual Investment Services, LLC terminated Test pursuant to a "Permitted to Resign" based upon allegations that:
Representative was permitted to resign while under internal review for allegedly placing clients' initials on Investment Account Transaction Analysis Forms in the "Costs, benefits, rationale" Section of the Forms without the clients' knowledge or authorization. After denying the allegations several times during the Firm's investigation, including denying the allegations in writing, Representative admitted that he placed the clients' initials on the Forms.
In his response to his former employer's disclosure, BrokerCheck discloses this "Broker Statement":
My compliance issue:
In brief, I took a short cut for an existing client who forgot to check a box. I checked the box, initialed for client and submitted form. When first asked about it I denied it, then later confessed. It was wrong and I should not have done it.
In brief, I took a short cut for an existing client who forgot to check a box. I checked the box, initialed for client and submitted form. When first asked about it I denied it, then later confessed. It was wrong and I should not have done it.
My local compliance dept reinforced to me proper protocol. We had an understanding back in April when this happened. No issues since. Then on 7/27, after work, I got a call that the home office required my termination.
The account was ultimately opened with client initials and funded.
No misappropriation of funds or unauthorized trading. No customer complaints, client still a client today.
No misappropriation of funds or unauthorized trading. No customer complaints, client still a client today.
2023 AWC
Test's insertion of the client's initials did not end with his registration termination by Northwestern Mutual Investments Services but also triggered a FINRA regulatory investigation. For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, David B. Test submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of David B. Test, Respondent (FINRA AWC 2021072263801 / January 19, 2023) https://www.finra.org/sites/default/files/fda_documents/2021072263801
%20David%20B.%20Test%20CRD%202341570%20AWC%20geg%20%282023-1676766007712%29.pdf
The AWC asserts that Test was first registered in 1993, and by 2009, he was registered with Northwestern Mutual Investment Services, LLC. In accordance with the terms of the AWC, FINRA imposed upon Test a $5,000 fine and a two-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:
In February 2021, Test met with certain customers to transfer their assets to a mutual fund sold through Northwestern Mutual and provided the customers with new account documents to complete and sign. After the customers had signed the new account documents, Test realized that seven customers had not checked certain boxes on their new account documents related to the rationale for the transactions. Without the customers' prior permission, Test checked the applicable boxes on a total of seven new documents that had previously been signed by the customers and signed the seven customers' initials next to the boxes he had checked. Test then submitted all the documents to the firm. Subsequently, Test admitted to the firm that he had signed the customers' initials on the documents without the customers' prior permission. 2
By forging seven customers' initials, without their prior permission, on a total of seven customer account documents, Test violated FINRA Rule 2010. In addition, by altering the documents after they had been signed by the customer, Test falsified the seven documents and violated FINRA Rule 2010.
. . .
By forging and falsifying the documents described above, Test caused Northwestern Mutual to maintain inaccurate books and records, in violation of Exchange Act§ l 7(a) and Rule l 7a-3(a)(l 7) thereunder, and therefore violated FINRA Rules 4511 and 2010.
= = =
Footnote 2: After Northwestern Mutual identified Test's forgeries, the firm requested that the seven customers re-execute the new account documents, and all of the customers re-executed the documents with the same information Test had previously submitted.
Ouch! The FINRA Arbitration Award and the BrokerCheck disclosures never use the word "forgery," which is set out in the AWC. Not sure if Test considered that one of the unfortunate aspects of filing a FINRA arbitration is that it generate a public, published Award, which often prompts inquiry by the public and industry (such as motivated this article), and, such interest would likely reveal the public, published AWC replete with that inflammatory characterization of forgery.
Not Lawyering Up
Frankly, after reading through the Award, BrokerCheck, and the AWC, it seems like Test brought a lot of this on himself. Of course, he may also have exacerbated his situation by handling his problems pro se. Perhaps a lawyer might have offered a more compelling narrative that placed Test's conduct in a more favorable light. On the other hand, Test's BrokerCheck "Broker Statement" earns him some points for his clear expression of remorse and acceptance of liability. Clearly, he says what needed to be said; namely, that he took a "short cut," initially denied his actions, then fessed up and acknowledged that his evasiveness was wrong. Would a lawyer have done more with Test's Broker Statement in terms of settling FINRA's regulatory case? That's a tough one to answer, and there's the issue as to whether the cost of a lawyer may have proven prohibitive.
In drafting that "Broker Statement," a lawyer might urged Test to note -- and reiterate -- that his alleged misconduct occurred in April 2021; and it was only some three months later, in July 2021, that Northwestern required his termination. That delay might imply that the firm wasn't all that troubled by the signature insertion and was mulling over ways to sanction Test's misconduct short of a full-blown termination or request for same. And let's not forget the need to place 2021 into historic context. A lawyer might have injected some reference to the then full-blown Covid pandemic and explored whether that may have engendered the very signature-short-cut at issue. A lawyer might have better underscored for FINRA the facts that there were no customer complaints, no misappropriation, no unauthorized trading, and that the client at issue remained a client after the events. Does any of that significantly alter the short cut? Probably not, and we should be mindful that forgeries of customers' signatures/initials are often used to engage in the worst predatory violations. Ultimately, we're left to wonder whether Northwestern have asked Test to resign if, from day one, he had accepted responsibility when first confronted by Compliance.
When all is said and done, I'm not sure that Test should have filed his FINRA Statement of Claim because it's hard to discern a pathway to victory given his own admissions and the FINRA AWC. Another important consideration is that the FINRA Arbitration Award invites further scrutiny of Test, and some of what is disclosed by further inquiry beyond the Award is damaging.
Ummm . . . what???
Raymond James Financial Services, Inc., Petitioner, v. Mark Joseph Boucher, Respondent (Order Denying Petitioner's Petition to Confirm Arbiration [sic] Award; Denying Application for Default Judgement Against Respondent, United States District Court for the Southern District of California, 22-CV-01658 / October 20, 2023)
Raymond James Financial Services, Inc., Petitioner, v. Mark Joseph Boucher, Respondent (Order Denying Petitioner's Petition to Confirm Arbiration [sic] Award; Denying Application for Default Judgement Against Respondent, United States District Court for the Southern District of California, 22-CV-01658 / October 20, 2023)