With total arbitrations expected to hit an all-time high this year, reps must be vigilant in client dealings or they may get hit where it hurts — in the pocket. Through the first six months of the year, arbitration awards totaled $72 million, on track to far exceed the $97 million that was awarded for all of last year.
James Eccleston, head of the securities law practice at Chicago-based Shaheen, Novoselsky, Staat & Filipowski, says it's not unusual for firms that settle arbitration cases to make the broker involved in the accusations pay part of the bill, even if the rep isn't specifically named in the case. A broker still with the firm at the time of arbitration has few choices.
The only real options are to negotiate payment — or leave the firm. “If the broker is not there anymore, the firm does not have that leverage,” Eccleston says.
But leaving — or being fired — is not a sure way to avoid paying. A former employer can continue to demand a contribution from the broker. Don Domingue, a broker formerly with Salomon Smith Barney in Lafayette, La., says something similar happened to him when a client decided to sue over losses from options trading.
Domingue, now at Raymond James, was dismissed from the case, but Smith Barney settled for $60,000, and told him he was responsible for half. He was told it could be paid with a forgivable loan, but he didn't like the terms. Domingue was fired and is suing Smith Barney.
His first misstep, he says now, was accepting in-house counsel to represent him (see story on page 95). While independent counsel can help, it won't solve every problem. A client of Eccleston's got a claim dismissed that his employer settled. The firm still demanded half the payment from the broker.
In that situation, a broker may have no choice, but a lawyer should be able to help negotiate a lower payment.