In recent years, Prudential Securities has fended off numerous challenges to the legality of its deferred compensation plan, known as MasterShare, but it might have more than the usual amount of trouble shaking Yaakov Holansky’s case.
The trouble for Pru began when Prudential Financial filed a motion to dismiss a case brought by Holansky, a former broker at the firm. (Pru Financial has spun off its brokerage unit to Wachovia but is liable in the Holansky case.) Not only did Holansky survive that motion, but a judge in Federal Northern District Court of Illinois ruled that MasterShare might qualify as an employee benefit pension plan, and therefore be governed under the U.S. Department of Labor Employee Retirement Income Security Act (ERISA).
“What disturbs Prudential is that the judge allowed the possibility that [MasterShare] might be an ERISA retirement plan,” says a source familiar with the case. “That’s not what it is or what it was ever presented as being. What it is a three-year golden handcuff.” The source noted that past litigation courts found that ERISA did not apply to the MasterShare program.
Holansky now embarks on an effort to prove that his case should fall under ERISA, which strictly prohibits forfeiture of employee contributions. (MasterShare is a deferred comp plan in which employees authorize withdrawals from their paychecks to buy discounted fund shares, with the understanding that funds in the program are forfeit if the employees leave the company or are fired prior to the three-year vesting period.)
The monetary stakes of Holansky’s specific case are nominal—just under $10,000 are at issue. But if he wins using ERISA, it could open the door to class actions from other brokers who have had money withheld via MasterShare. Indeed, Holansky’s counsel, Robert Holstein of Chicago-based Holstein Law, has requested that this case be certified as a class action.
Pru, which did not return calls for comment, has faced over a dozen MasterShare challenges in the past few years—including a number of unfavorable rulings on the state level. But it always has been able to overturn the decisions in the appellate courts. “It’s a standard pattern,” says a former Pru executive who is familiar with the firm’s legal matters.
Historically, Pru has relied on New York Labor Law 193, which states that employers can make deductions from an employee’s wage that “are expressly authorized in writing by the employee and are for the benefit of the employee.” Indeed, in Holansky’s case Prudential asked the judge to acknowledge the precedents set in previous cases, stating that MasterShare should not be found to be governed by ERISA because “the existence of the identical forfeiture provision did not stop six judges on the New York Court of Appeals from unanimously holding” that the plan is valid under New York Labor Law.
However, the Holansky judge ruled that “none of Prudential Securities’ cited case law is controlling precedent,” and that “based upon the allegations before us, it is possible that the surrounding circumstances at Prudential Securities were such that the plan was governed by ERISA.”
Started in 1999, MasterShare offers employees the opportunity, via irrevocable written authorization, to deduct up to 25 percent of their gross pay for one calendar year towards the purchase of discounted shares in a stock index fund. The discount functions as a de facto company match. MasterShare also lets a broker lower his gross pay, thus deferring income taxes.
The deductions continue in subsequent years unless the broker cancels or changes the amount of the deduction. After three years, the broker can renew the account or cash in the shares and then pay income tax on the balance. However, if the employee leaves or is fired for cause before the end of that three-year period, the entire balance in the account forfeits to Prudential.
MasterShare is, at its heart, an employee retention tool. Firms are interested in such programs for one reason: clients tend to go where their brokers are. In a 2003 Citigroup survey of 1,100 high-net-worth investors, 77 percent of UBS clients said they’d likely move their accounts if their advisor left the firm. At Morgan Stanley and Merrill Lynch, the numbers were slightly less chilling—38 percent and 28 percent, respectively—but still sobering.
Nick Ferber, a recruiter with Sanford Barrows in Fort Lauderdale, Fla., says the wirehouses are getting smarter about freeing poached reps from the “golden handcuffs” of their former employers.
“As a big firm, you either have to decide you’re going to personally groom every single million-dollar producer because it’s too difficult to steal from other firms, or you’re going to find a way around it.”
The typical “way around it” is to make the poached rep whole by paying him the deferred compensation he’s leaving behind. Only top producers—those with at least $400,000 in annual production and 30 percent of a book in fee-based business—can expect such treatment, says Mindy Diamond, recruiter and founder of Diamond Consultants in Chester, N.J.
“And even for them you're not going to get a dollar-for-dollar deal,” Diamond says. “It's offered on a case-by-case basis.”
In Holansky’s case, Prudential allegedly got him to sign on the dotted line as a trainee, when he says he wasn’t able to understand the forfeiture provision involved in the MasterShare plan. It was when he wanted to leave the firm that he learned of his potential loss.
Holansky says the firm disingenuously promoted the plan as a pension plan and that he was “strongly encouraged” to join with the suggestion that trainees not participating would be perceived as transient.
