Business was looking up for Mark Immel in January. The longtime adviser had just won a $450,000 arbitration case against his former employer, Raymond James & Associates, after a tumultuous four years that had cost him tens of thousands of dollars and many sleepless nights.
Immel, an adviser for 27 years in central Florida, had once been a top producer at the firm; he even belonged to the firm's chairman's club in 2013. But in February 2014 he was terminated from Raymond James. The firm said management had lost confidence in him, according to a note in his CRD file on FINRA’s BrokerCheck database. Immel disagreed and he and the firm began trading claims against each other in FINRA arbitration: The bitterest dispute revolved around the two parties’ counterclaims of breach of promissory — more commonly known as clawbacks.
After the termination, Raymond James had sought roughly $330,000 for repayment of a promissory note Immel had signed, according to arbitration documents. Immel claimed the firm had unjustly enriched itself by keeping his approximately $80 million book of business following his termination.
In January 2016, three arbitrators sided with Immel.
Victory proved to be short-lived. Two months later, Raymond James asked a Florida state court to vacate Immel's award based on a technicality: The arbitrators had included in their ruling a claim that Immel had withdrawn during arbitration. A spokeswoman for Raymond James declined to comment on the case.
The roughly 18-month
On the morning of April 26, just three weeks before the case was to be heard before a state judge, Immel left his home in his black Chevy Suburban. He pulled over on the side of a road in Ocala, Florida, not far from where he lived and shot himself in the chest, according to a police report. Authorities found Immel dead at about 9:40 a.m. On the dashboard, they found $168 in a money clip, an insurance policy and a note Immel wrote to his wife and daughters. The engine was still running.
TANTALIZING BONUSES
The legal disputes over clawbacks are complex, often controversial and sometimes furiously contested.
The source of so much legal squabbling lies with the tantalizing bonuses firms dangle before advisers to entice them to switch employers.
Top producers can earn huge windfalls. When Wells Fargo Advisors tried to recruit brokers from Credit Suisse last year, the firm offered them up to 300% of their annual production to make the move,
The bonuses are often structured or partially structured in the form of forgivable notes. For example, a broker who signed a seven-year contract would see one-seventh forgiven each year.
In theory, if a firm paid a broker $1 million to move his book of business over and the broker left after a year, then the firm just lost that money, says Dana Pescosolido, a retired attorney who represented firms in promissory note cases and who currently serves as a mediator in securities industry disputes. But that’s not what happens.
"I think management's perspective is, 'He's left, we put out a lot of money and we have to get it back,' " Pescosolido says.
James Mann, a former FINRA arbitrator and Merrill Lynch compliance officer, says there is a behavioral incentive, too. "If the broker walks away and they don't pursue the note, then they think, 'Well, if we don't pursue this, then what's to stop the next guy from also walking away?'"
The promissory notes that underpin these bonuses typically provide firms with a legal right to recoup bonuses from advisers who either are fired or quit before their contract is up. Yet every year advisers facing up to $1 million or more in claims resist repaying on grounds that their former employers were the ones chiefly responsible for breaching the terms of the agreement.
"I lose years of my life. They can settle, write a check and move on," says an adviser whose book of business dropped by $40 million after he alleged he was wrongfully terminated.
THE LOSING SIDE
There were 401 arbitration cases involving a claim of breach of promissory note in 2015. The prior year, there were 476,
Arbitrators awarded wirehouse and regional broker-dealers more than $60 million against their former employees in 2015, according to data compiled by On Wall Street. For firms that rack up billions in revenue each year, that figure may seem paltry. But advisers on the losing side say those numbers can ruin careers.
In Immel's case, Raymond James and his widow agreed to a confidential settlement weeks after his death, according to the couple’s attorney, who declined to elaborate.
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The team accused the firm of preventing them from properly conducting business with their clients, a charge that a FINRA arbitration panel rejected.
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The adviser was also ordered to pay $300,000 to cover Wells Fargo's legal fees.
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Ameriprise lost several arbitration cases in attempt to claw back more than $800,000 in stock awards the firm gave to two former employees.
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Many other advisers lose their arbitration cases for lack of three things: resources, good legal counsel and sufficient evidence to back up counterclaims against ex-employers.
"You need to give [the arbitrators] a reason not to enforce the note," says Mann, who is also an arbitrator at JAMS, a private mediation dispute company. "You can't simply say, ‘I don't have the money.’ You need to say something to the effect that it's not your fault that you breached the note; it's your employer's fault."
Yet some brokers say they are undone by verbal agreements with branch managers, who act as key agents in firms' recruiting efforts — and who are incentivized to bring in new talent. As part of the negotiations with a potential hire, a branch manager may make verbal promises that aren't subsequently delivered on — though these verbal agreements are increasingly less common in the business, according to industry insiders.
A former wirehouse adviser says he switched firms in part because his hiring manager promised him various perks, such as a corner office and permission to bring his dog to work. He asked not to be named because of a confidential settlement.
"The way I was treated was two-fold," the adviser recalled of his time with the wirehouse. "They basically wined and dined me and promised me the world when they were recruiting me. Then, of course, once I got there, things were different."
"I think there are people who cross the line in recruiting tactics. Just because a firm gave money it doesn't mean that everything they did was right," attorney Michael Valenti says.
The verbal agreement was undone when, three months into the job, the hiring manager left and his successor as branch manager was unwilling to keep up the firm's end of the bargain, the adviser says.
Complaining only made things worse, and soon the adviser found himself transferred to a windowless room in an office 60 miles away, he says. Denied resources and lacking motivation, his production suffered and as a result his pay dropped significantly. "There was nobody to talk to about it and the new guy just said, 'Too bad.' "
The adviser left the firm and was later hit with a promissory note claim in arbitration. His legal bills eventually became too burdensome.
"After about $25,000 worth of lawyer fees, we got nowhere and we finally agreed to pay [the firm] what they asked for. I just couldn't pay the lawyer anymore since they just kept throwing things at me," he recalled. "I ended up having to pay them back around $100,000 or so, including my lawyer and all the costs."
The adviser, who now runs an independent practice, says back payments from the ruling will likely continue well into his planned retirement years.
"I am turning 65 and I'll be paying this off until I am 67 years old — I have 18 more payments and my payments are higher than my mortgage, I might add," he says. "I honestly never plan on retiring now. I will just work until I can't work anymore."
PYRRHIC VICTORIES
Advisers who choose to skip hiring a lawyer and represent themselves almost always lose, largely because they often face off against well-trained corporate attorneys who have robust resources, insiders say.
It's "the equivalent of Michael Jordan having a one-on-one with a third grader," says James Eccleston, a Chicago-based securities attorney of 30 years.
Statistics compiled by Pescosolido, the retired attorney, confirms this. When the broker fully contested the firms' breach of promissory note claims and was represented by an attorney, the firms won 100% of the principal amount of the note in 34 arbitration cases out of 54 in 2015.
In the other 20 cases, arbitrators either awarded less than the amount sought by the firm or rejected the claims by the firm on account of the broker's counterarguments, according to Pescosolido. In the 19 cases where brokers represented themselves and fully contested the claims, they lost every time.
"They don't stand much of a chance," he says, noting that the attorneys representing the firms are well-trained professionals who "do it for a living."
Some brokers, like ex-wirehouse adviser Britt Doyle, start with legal representation but run out of money to pay mounting legal bills.
"I couldn't pay the attorneys anymore, so I represented myself," says Doyle, who says he once oversaw about $600 million in client assets. He adds, "Of course I didn't know what I was doing compared to [corporate] lawyers."
Doyle lost a clawback case in FINRA arbitration to UBS, which won more than $4 million in January 2015, according to a copy of the award. A UBS spokesman said the firm was pleased with the outcome of the arbitration case.
"I'm a good poster child for what not to do," Doyle says.
FINRA barred Doyle in September 2015 for failing to pay that arbitration award. He filed for bankruptcy in April 2016, and now works in a new role at US Capital Partners, an investment bank.
"I think management's perspective is, 'He's left, we put out a lot of money and we have to get it back,' " says Dana Pescosolido, a retired attorney who serves as a mediator in securities industry disputes.
HIGH COST OF VICTORY
Even some advisers who won their cases complain that the cost of victory was too much to bear.
Sometimes arbitrators award damages to brokers, only to undercut those awards by also ordering them to pay their former employer for breach of promissory note.
One former wirehouse adviser, who managed more than $100 million in client assets, says it took him several years of litigation to beat back his employer's demands for repayment for a promissory note and to simultaneously win more than $1 million in damages for wrongful termination.
While his case was ongoing, he couldn't find another job because his reputation was tainted, says the adviser, who also asked not to be named for fear of legal repercussions. Plus, the costs of litigation slashed his award in half.
Now in his mid-60s, the adviser is going back to work — and building his book of business from scratch because the wirehouse was able to retain the clients while the litigation was ongoing.
Other advisers say those same burdens led them to accept confidential settlements for less than the original amount they felt was their due. One adviser says that was his fate after a tough fight against his former employer, a regional brokerage firm. He asked that neither his name nor his ex-employer's name be used due to the confidential nature of his settlement.
The adviser, who once generated almost $1 million in production, says the local branch manager forced him to take on a partner, a new employee who had no clients but was friends with the manager.
"Suddenly, he was my new partner who didn't do anything," he says.
Complaining about it only put a target on his back, says the adviser, who has roughly three decades of industry experience.
The adviser planned on switching firms when his contract drew to a close, but a month before that could happen, he was fired. According to his BrokerCheck record, the reason given was that management lost confidence in the adviser's ability to perform and comply with firm rules and regulations. The adviser criticizes the firm's choice of words, saying that the note intimates so much by being so vague. "How do you refute that?"
Following his termination, the adviser took his ex-employer to arbitration to seek damages for wrongful termination. The firm, meanwhile, demanded that he pay the remaining balance on his promissory notes. Two years of ensuing litigation took its toll, financially and emotionally. In the meantime, he landed a position at an independent firm, but his book of business shrank to $60 million from $100 million.
Last year, the adviser says he settled with the firm — they forgave the remaining $80,000 on his promissory note — because the firm could keep fighting whereas he was exhausted.
"That's the whole problem with the arbitration process," he says. In a war of attrition, advisers can't win. "I lose years of my life. They can settle, write a check and move on."
BROKEN PROMISES
"Most [promissory note] agreements will contain a clause to repay the firm that portion of the unpaid promissory note balance upon any kind of termination, whether that termination is for cause or not for cause or even wrongful," Eccleston says.
Eccleston and other attorneys say that the language is often ironclad, and the firms view these contracts as clear-cut.
To rebuff breach of promissory note claims in arbitration, an adviser needs to present a strong defense or counterclaims, and evidence showing that their former employer breached the contract, such as by inhibiting an adviser's ability to perform their job.
For example, consider if a firm was to alter the compensation model and start sending small accounts to a call center or robo adviser.
"Let's say, when you hired the guy, he had a lot of these accounts. So in essence how can he make a living if you take his book of business away? It is arguments like that that have been successful," Thomas Costello, a Towson, Maryland-based attorney who has represented advisers in arbitration, says of an effective defense.
Adviser Brandon Neal was enticed to leave his position at J.P. Morgan Securities' office in Louisville, Kentucky, because Morgan Stanley management told him that they would be opening an office in his hometown of Bowling Green, where he wanted to move, and that all of his business would easily transfer over, according to Michael Valenti, Neal's attorney.
But there were never any plans to open a Bowling Green office, Valenti contends, and Morgan Stanley couldn't accommodate a big portion of Neal's business, which included servicing clients who had large numbers of shares in employee stock ownership plans.
As a result, Neal, 42, who had received a $240,000 recruiting bonus, took a pay cut, his attorney says.
"He averaged approximately $200,000 a year in income while at J.P. Morgan, during his last three years," Valenti says, adding his client's income at Morgan Stanley dropped to $43,000.
He says that management refused Neal's request to have his deal restructured. Neal quit the firm in January 2014, according to FINRA BrokerCheck records.
Two months later, Morgan Stanley filed a statement of claim in arbitration, seeking over $300,000 in damages and attorneys' fees against Neal for breach of promissory note, according to arbitration documents. Neal responded by seeking damages of his own for misrepresentation and fraud. After a two-year long process, a panel of three arbitrators rejected Morgan Stanley's claims and awarded Neal $300,000 in damages, according to a copy of the arbitration award. As is customary, the arbitrators did not explain their ruling.
Valenti says his client won because they were able to produce emails showing that the firm had made false promises to Neal regarding the Bowling Green office and that his book of business would transfer over.
"I think there are people who cross the line in recruiting tactics," Valenti says. "Just because a firm gave money it doesn't mean that everything they did was right."
A Morgan Stanley spokeswoman declined to comment on Neal's case. But of the firm's policy regarding promissory note cases, she says: “We expect employees to honor the contractual commitments they make to repay promissory notes, and if they do not, they can expect us to pursue our rights."
It's "the equivalent of Michael Jordan having a one-on-one with a third grader," James Eccleston, a Chicago-based attorney of 30 years, says.
NO REPRESENTATION
It is not known how many cases are settled, but attorneys who have worked on both sides say that they sometimes reach an agreement before a panel of arbitrators hears arguments in the case.
"There's not a firm that I am aware of that doesn't try to make some kind of contact with the broker," says Tom Lewis, an attorney at Stevens & Lee in Lawrenceville, New Jersey.
But several of the advisers interviewed say the process for resolving disputes, particularly arbitration, is unfair. They point to the confidential nature of the arbitration process and settlements, which they say allows firms to sweep misconduct under the rug. Unlike in civil court, FINRA arbitration proceedings are not public, but are mandatory. And arbitrators aren't required to explain their rulings.
Advisers charge that firms prefer FINRA arbitration because they have the upper hand in that forum. Wealth manager Tom Pair's experience in a dispute with his former employer, Barclays Capital, epitomizes that.
Pair joined the firm's Atlanta office from UBS in September 2010, per BrokerCheck records. He originally received a forgivable loan from Barclays Capital, but in December 2010, the firm had him sign a new $1.04 million forgivable loan with Barclays Bank, according to documents the bank filed in federal court. Barclays Bank, unlike its U.S. broker-dealer unit, was not a member of FINRA; any dispute between "[Pair] and the bank, including any disputes arising out of or relating to the new loan, are not subject to FINRA arbitration but rather will be adjudicated in an appropriate court of law," according to court documents.
Barclays Capital terminated Pair's employment on Jan. 7, 2014; according to a note on his BrokerCheck record, the firm fired him because Pair "disregarded management instructions by including an unapproved page in a large presentation to a client." Pair contests that he was wrongfully terminated. A spokeswoman for Barclays declined to comment on his case.
The next day, Barclays Bank transferred the promissory note he signed to Barclays Capital. And in May 2014, Barclays Capital filed a breach of promissory note claim in FINRA arbitration, which Pair opposed and tried to have dismissed so that any dispute would be heard in a civil court, per the terms of the note he originally signed.
The arbitrators dismissed his motion, and, during arbitration hearings, denied his requests to have witnesses testify, including Gerald LaRocca, the Barclays managing director who signed the reassignment of his note, according to court documents.
"I was obviously flabbergasted because this guy signed two of the exhibits to their original statement of claim. How could the arbitrators not let this guy talk? He signed the documents that are being disputed," says Pair, 47, who sought damages against Barclays in arbitration for wrongful termination among other misconduct.
In December 2015, the arbitrators sided with Barclays, awarding nearly $600,000 for the remaining balance on the promissory note, $19,000 in interest and $360,000 in attorney's fees, according to a copy of the award.
Pair's case is currently pending in federal court in Atlanta. He is attempting to vacate the award on grounds that the arbitrators overstepped their authority by hearing the case in the first place, and that they are guilty of misconduct by denying him the opportunity to present evidence.
Advisers who choose to skip hiring a lawyer and represent themselves almost always lose, as they often face off against well-trained corporate attorneys who have robust resources, insiders say.
NO SEAT AT THE TABLE
It is notable that advisers' criticism of the arbitration process mirrors charges leveled against FINRA by investor advocacy groups. As an industry-funded regulator, FINRA often faces accusations of being too soft on the firms it is charged with overseeing. The Wall Street regulator has repeatedly shot back at its critics that it aggressively polices the industry, noting the substantial fines it levies and the number of rogue brokers it regularly bars.
FINRA's board of governors has representatives from the industry as well as public entities. The board includes numerous current and retired executives, such as Merrill Lynch's John Thiel, as well as former regulatory officials and two Harvard professors. There are no advisers currently practicing on the board. In other words, advisers don't have a seat at the table.
That may seem odd given that FINRA arbitration awards group claimants into one of three categories: customers, members (firms) and associated persons (advisers).
Rick Berry, director of dispute resolution at FINRA, contested advisers' criticism of the arbitration process, adding that they or their attorneys are free to share information about their arbitration cases.
“FINRA rules require that staff and arbitrators keep records confidential, but the parties themselves can make pleadings, claims and anything they’d like public. Every arbitration award is publicly available through FINRA’s online database," Berry said in a statement. Critics also charge that FINRA needs more transparency in how it operates; the regulator said in September that Bob Muh, CEO of Sutter Securities, was elected to its board as a representative of small firms. But FINRA did not make public how many votes Muh received.
And unlike investors, advisers also don't have the support of strong advocacy groups, pushing for changes to the process.
"Something's got to be done, reformed. FINRA's not doing anything about it," says the adviser who got his $80,000 promissory note case resolved through a confidential settlement.
The Department of Labor may have curtailed the scope of the problem, but perhaps only briefly. The agency recently issued regulatory guidance in October targeting the back-end compensation of recruiting deals for creating potential conflicts of interest, prompting some firms to cut the size of their deals. However, the incoming Trump administration is likely to overturn the rule.
Several advisers, burned by the experience of their promissory note cases, have since gone independent, vowing never to work again for a major Wall Street firm or sign a promissory note.
"No matter what they promise you, it's not worth it; all the intangibles that you go through and the uncertainties, and all of the things related to that," says an ex-wirehouse adviser, who also asked not to be named due to a confidential settlement.
"It was a bad mistake for falling for their spiel," he says.
Additional reporting by Andrew Shilling and Suleman Din
