A case in Arkansas involving two brokerages resulted in an $18 million arbitration award to the firm claiming it was raided. It may be a sign of things to come, according to a compliance expert.
Stephens Inc., based in Little Rock, accused Benjamin F. Edwards & Co., a regional rival, of poaching four of the six brokers in its Jonesboro branch over several months starting in 2016.
Stephens claimed the recruiting amounted to an “unfair raid,” resulting in the loss of at least 40% of revenue.
Two of the three arbitrators on the FINRA panel found that the four departed brokers accounted for “well over 50% of annual production” and also found evidence of breach of contract. They also found “extensive evidence” that Edwards’ recruiting was part of a single hiring plan.
The advisor who recruited the others from Stephens was found liable for punitive damages of $1 million.
Linda Nettles Harris was the arbitrator who dissented. She found that “most of claimant’s contentions were based on unreliable evidence, speculation and conjecture, and that a review of the hearing testimony and exhibits revealed financial advisors who terminated their employment with claimant and went to work for BFE based on real or perceived best self-interest and better working conditions.” Harris also wrote that there “is no FINRA rule, SEC rule or case law that clearly defines raiding.”
Harris did not respond to an email requesting comment.
Edwards said in a statement that it will appeal the ruling: “We vehemently disagree with the decision of the panel and intend to challenge the award. We believe we conducted ourselves properly during the recruiting process and believe this is supported by the strong and well-reasoned dissent of one of the three arbitrators.”
Todd Cipperman, founding principal of Cipperman Compliance Services, said challenging the award may simply amount to trying to reduce the cost of doing business.
“Edwards is making a business decision here. Was it worth $18 million?” Cipperman asked. “It might be worth the penalty. There’s such a war for talent now that that move could be very profitable. When there wasn’t a war, firms were more cautious, but it’s changing now because there’s such competition. They don’t need to reverse the award. Even if they knock it down, it’s a success.”
Mark Elzweig, president of Mark Elzweig Company, an executive search firm, agrees that caution was, and in some cases still is, the order of the day.
“Lawsuits for raiding are relatively rare,” he said. “If a firm feels it is in danger of being sued for raiding, they just stop hiring.”
As for the size of the award, and the million-dollar fine on one advisor, Cipperman said it doesn’t surprise him. “FINRA arbitrators are notoriously mercurial, and the decision was not unanimous,” he said. “You don’t want to be in FINRA arbitration in the first place. There’s no idea how it will roll.”
But the war for talent could result in more such arbitration cases, he said.
“If you have a good book of business, you have way more places to go these days,” Cipperman said. “Everyone is running platforms. But the business risk is that you may be stopped by FINRA arbitration.”
He pointed out that the dissenter wrote that the brokers wanted to leave Stephens because they were unhappy with the way the firm was enforcing the Department of Labor fiduciary rule.
“As a compliance guy, that doesn’t make me too happy, hearing that a firm may have used lesser compliance as a way to recruit reps, but that shows the lengths firms are willing to go to to recruit top producers,” Cipperman said.
“There are not a lot of reps with provable books of business,” he added. “And they tend to be coddled, so it’s harder to dislodge them from their platform.”
Cipperman said we are likely to see more cases like this one as the general agreement that gave rise to the broker protocol fades away. “There are now so many startups and platforms, either firms are not parties to it or don’t care about it,” he said.
So should advisors still be cautious to avoid ending up in court or before a FINRA arbitration panel?
Rob Sechan, CEO of NewEdge Wealth of Stamford, Connecticut, recently added a former UBS practice managing $3 billion in client assets in a recruiting and M&A deal.
“It shouldn’t be a tremendous concern as long as you follow the rules,” he said. “We are very thorough in terms of following the rules. That doesn’t mean that (a firm) won’t erroneously do that. The legal system is such that anybody can accuse you of anything.”
