Smith Barney Wins One in Cap HearingsSmith Barney Wins One in Cap Hearings

David A. Gaffen

A superior court judge in California has ruled for Smith Barney in a case related to its deferred compensation plan, which has been the target of numerous lawsuits from former employees. Deferred comp plans at a number of firms have been assailed by some reps, and while recent rulings against firms had strengthened the cause, this ruling is a setback for brokers.

In the case of David Schachter v. Travelers Group (then the parent of Smith Barney), Judge Victoria Chaney of Los Angeles Superior Court ruled against Schachter, who had worked as a broker at Smith Barney until 1996. The case was dismissed, with Chaney ruling that the firm's capital appreciation plan (CAP) — a deferred compensation arrangement that lets employees purchase Citigroup stock through payroll deductions — is not unlawful and does not violate labor laws.

The differing nature of the various state labor laws has resulted in different rulings in various states — a court in Illinois recently ruled that the Smith Barney cap plan did violate that state's wage laws.

For Smith Barney, it was a win after a few consecutive decisions against the firm. An Illinois judge ruled in January that the brokerage firm's plan did violate state wage laws, and another recent case was granted class-action status.

Former Smith Barney brokers have brought a number of lawsuits against the firm in the last few years. Their attorneys have argued that the schedule on which payroll deductions turn into shares — which involves withholding of wages on a deferred basis — is unfair.

“We're pleased with the decision and that we continue to believe CAP is upheld by applicable law,” said a Smith Barney spokeswoman.

SB's CAP has been under fire for some time. Every employee participates through fixed, company-determined deductions. The deductions are used to purchase restricted stock at a discount rate. After two years, the restricted shares turn into Citigroup common shares. The problem lies with the restricted shares: If an employee leaves the company voluntarily or is fired with cause, he forfeits them. The idea is to discourage employees from leaving the firm, but many believe the practice is an illegal taking of employees' earned fees and commissions. That is the crux of Schachter case's argument when originally filed in 1998.

But Chaney, in her ruling, disagreed entirely. “When class members voluntarily terminated their employment, they were not forfeiting unpaid wages. Rather, it was a forfeiture of restricted shares purchased with wages,” she wrote. “Moreover, there are sound policy reasons underlying the forfeiture clause — to encourage employees to remain in their position and discourage frequent turnover.” Attorney Ashley Posner of Los Angeles, who represents Schachter, says he will appeal the decision.