By Erwin J. Shustak

Over three years ago, on October 20, 2015, Credit Suisse abruptly announced it was exiting the U.S. wealth management business and closing its U.S. private banking group.  At the time, Credit Suisse had over 300 registered brokers in its U.S. private banking unit.  Rather than close the business or sell the division, however, Credit Suisse entered into an “exclusive recruiting arrangement” with Wells Fargo, ostensibly “to provide relationship managers to transition to Wells Fargo’s brokerage business, Wells Fargo Advisors”.  At the time, Credit Suisse issued a press release announcing, “we have taken the decision to transition our current Private Banking brokerage business model”, explaining in a press release “the economics for Credit Suisse do not yet meet profitability criteria and, therefore, cannot achieve optimal returns for our shareholders relative to our alternatives”.  Reading between the lines, Credit Suisse’s foray into the U.S. private wealth management business never got the traction the firm anticipated and was a money losing proposition.

So, what was the “exclusive recruiting arrangement” with Wells Fargo?  Simply stated, Credit Suisse allowed Wells Fargo to “cherry pick” the brokers it wanted from the Credit Suisse minions and take on those producers worth taking who were willing to work under the Wells Fargo platform and name.  And, to ameliorate the pain of shutting down, Wells Fargo even agreed to pay CS a recruiting payment for each former CS broker who successfully transitioned to Wells Fargo.  Some moved to Wells Fargo; many did not.  Of course, it was only a few years later that the Wells Fargo name became indelibly tarnished and trashed when it was revealed the firm had opened hundreds and thousands of accounts, credit cards, loans and other banking facilities without the approval or knowledge of the customers for whom those accounts were opened.  So, many of the former Credit Suisse brokers who did transition to Wells Fargo soon regretted their choice.

The major financial consequence for those brokers who chose not do transition to Wells Fargo, or who were not invited to the party, was the loss of their non-vested deferred compensation.  One of the ways the former Credit Suisse brokers were compensated, a method used by most of the major wire-houses, was to take a portion of the brokers’ compensation and pay it as deferred compensation, earned down the road.  Many of the Credit Suisse brokers had accumulated a substantial amount of non-vested deferred compensation; compensation earned but not yet vested for many reasons, primarily the fact the brokers had not worked long enough at Credit Suisse to have that deferred comp actually vest.  Of course, by essentially shutting its doors and letting its 275 brokers know they had to move to Wells Fargo or another firm since CS was shutting its doors, Credit Suisse guaranteed that non-vested deferred compensation would never vest.

The Credit Suisse Deferred Compensation plans had a number of names including the ISWAP Share Award; the PB USA Equity Share Award, the Growth Phantom Share Award; and the PB RM Contingent Capital Award.  All different named plans but all essentially the same.  Each of the plans provided the financial adviser would forfeit any unvested plan benefits if he or she resigned from Credit Suisse before being at the firm the required number of years to actually vest those benefits.

By closing its business, however, and allowing its brokers to “transition” to Wells Fargo, Credit Suisse effectively and completely prevented those brokers who had earned, but as yet unvested deferred compensation from ever having that deferred comp vest.  Credit Suisse, in turn, took the position that if a former Credit Suisse broker left CS to join another firm, that rep had resigned and forfeited what was estimated to be in totality over $300 million of accumulated, earned but as yet unvested deferred compensation.  Understandably, many of the brokers who had worked for, and earned that deferred compensation felt ripped off.  And they were!  So, what happened over the past three years and what can a former Credit Suisse broker do about that loss?

After Credit Suisse announced the shut down, and brokers who had accumulated earned but as yet unvested deferred compensation realized they would never be paid that money, a former CS broker, Christopher Laver, found a well-known class action firm that initiated a class action in Federal Court in San Francisco on behalf of him and all other similarly situated CS former brokers who, like Laver, lost all of their earned but unvested deferred compensation.  CS, in turn, moved to dismiss the class action successfully arguing that Laver, like all of his fellow former CS brokers, had agreed to arbitrate any and all claims against CS in mandatory FINRA arbitration and not in court and not by way of a class action.

In June, 2018, the federal judge before whom the case was pending dismissed the class action against Credit Suisse Group AG ruling that Laver, and those he purported to represent, were bound by the agreement each of them signed to arbitrate employment-related disputes and could not bundle those claims together in a court class action.

But, Individual FINRA Arbitrations Have Been Successful-

Most lawyers know that class actions are great for lawyers; not so great for class members.  We all have read the stories about the settled class actions where the lawyers get millions of dollars in fees, while each class member receives $1.99 or, worse, a coupon for free French fries (so long as the fries are purchased along with 10 Big Macs, only on a Monday and only between noon and 1 pm, or some nonsense like that).  Well, the Credit Suisse class action never got anywhere, and nothing came of it.

But a number of brokers who turned to experienced FINRA lawyers have been very successful in recovering their lost deferred compensation.  First, in November, 2018, former Credit Suisse broker Brian Chilton was awarded $844,621.00 in unvested, deferred compensation he lost when the firm notified him it was closing its operation.

The next month, November 2018, another former Credit Suisse employee, Nicolas Finn, was awarded $975,530.00 in lost deferred compensation by another FINRA panel for the same reasons Chilton got his award the month earlier.  Two cases that went to hearings; two very good outcomes for the brokers.

The defense that Credit Suisse asserted in both cases- which failed each time- was an argument that the brokers were trying to recover the same dollars twice. Credit Suisse argued that the brokers ultimately went to work for other firms and received up-front recruiting loans or advances and, therefore, they already were compensated for the deferred comp they lost when they were forced to leave Credit Suisse.  Obviously, neither FINRA arbitration panel found the argument very compelling.

In late January of this year, and facing substantial, individual claims from other, former CS brokers, Credit Suisse filed a court action to vacate the most successful win by former broker Finn.  In the Finn case, Credit Suisse filed pleadings in New York State Supreme Court (where the Finn arbitration took place) seeking to vacate the award arguing the three arbitrators in the Finn case showed a “manifest disregard of the law” by refusing to reschedule a hearing to accommodate testimony from Philip Vasan, the former head of the Credit Suisse U.S. brokerage business and by prohibiting “evidence of [Finn’s] negotiations with potential employers”.

While that challenge has yet to be heard of determined, the fact is that it is extremely difficult to overturn a FINRA (or other) arbitration award.  Credit Suisse did not challenge the Chilton award which was issued by a Boston based FINRA arbitration panel.  Some observers have noted Credit Suisse’s recent effort to vacate the Finn award is intended to send a message to other former CS brokers that the firm will fight tooth and nail and make it expensive and difficult to collect.  But that’s what good lawyers are for and many experienced attorneys know that a request to a panel to allow interest to accumulate on any arbitration award at a specified interest rate until paid more than makes up for any delay.

In California, interest on a broken promise (breach of contract) accrues at the statutory rate of 10% from the date of the breach until paid.

Our firm has extensive experience with intra-industry disputes and are interested in speaking to any former Credit Suisse brokers- or brokers from any other firm- who feel they have not been paid something they should have been by their former firms.

Shustak Reynolds & Partners, P.C.  focuses its practice on securities and financial services law and complex business disputes.  We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. For more information, contact Erwin J. Shustak, Managing Partner [email protected], or call 800.496.5900 ext. 109.

By Jonah A. Toleno

Nine financial services firms have announced plans to start their own trading exchange called the “Members Exchange”. Among the founding banks and brokerages are UBS, Morgan Stanley, Bank of America Merrill Lynch, Charles Schwab, and Fidelity Investments. The planned launch comes after years of broker dissatisfaction with the high data feed and stock monitoring costs charged by current leading exchanges.

The Members Exchange firms hope to reduce client services fees and increase transparency as a result of the new exchange. Industry members predict that the Members Exchange will encourage competition among current, existing exchanges, which currently charge firms substantial fees for necessary services such as data feeds and market information distribution, potentially leading to reduced fees across all the exchanges.

No date for the launch of the Members Exchange has been announced. Participating firms anticipate seeking approval from the Securities and Exchange Commission (SEC) for the exchange early in 2019.

Partner Jonah A. Toleno is based in our San Diego, California office. She practices in securities and financial services law and acts as trial counsel and outside corporate counsel for numerous financial, business, and individual clients. She can be reached at (619) 696-9500 or [email protected] with questions.

By Matias Montillano

On January 9, 2019, a Financial Industry Regulatory Authority (FINRA) panel found a former Edward Jones broker liable for $24,873 in compensatory damages due to the broker’s breach of contract and restrictive covenant with the firm.  See Edward Jones v. Prospera Financial Services, Inc. and Jay Ralph Slouffman, FINRA Office of Dispute Resolution, No. 17-03220 (Jan. 9, 2019).   The former broker oversaw roughly $186 million of customer assets at Edward Jones before he moved to Prospera Financial Services, an independent broker-dealer firm.

In its FINRA complaint, Edward Jones alleged that the former broker and the independent broker-dealer he affiliated with are using a list containing confidential and proprietary information, including the identity, primary phone number, call preference, account number, and address of over a thousand Edward Jones clients, in order to solicit those clients and induce them to terminate their relationship with Edward Jones.  Edward Jones also sought a permanent injunction preventing the broker from soliciting his former clients.  It requested nearly $219,000 in compensatory damages plus attorneys’ fees and costs.  The three-person FINRA panel awarded the firm approximately 11% of its requested damages and denied all other claims for relief, including attorneys’ fees.

This award highlights the extreme importance of following protocol when leaving a member firm. Brokers and financial advisors that leave member firms and remain in the industry must be diligent and remember to read their contracts.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We routinely represent broker-dealers and financial advisors in arbitrations, financial advisor transitions, broker protocol disputes and related matters. Please contact us today for a confidential, complimentary consultation.

By George C. Miller

In late December 2018, FINRA barred former Morgan Stanley financial adviser Daniel T. Levine from associating with any FINRA member firm in any capacity by way of an Acceptance Waiver and Consent (AWC) settlement agreement.   Levine resigned from Morgan Stanley in July 2018, following allegations that he had engaged in an unapproved outside business activity.  With limited exception, financial advisers are required to disclose to their supervising firm, and obtain advance approval for, any outside business activities in which they are engaged.

According to the AWC, in August 2018, as is virtually automatic following a financial adviser’s separation from a firm under any circumstances other than a clean, voluntary separation, FINRA sent Levine a request for documents and information pursuant to FINRA Rule 8210.  The 8210 process, also known as the FINRA inquiry process, is the initial phase of a FINRA enforcement action.

An inquiry may end in one of three ways.  First, FINRA may investigate and ultimately close the matter by way of a no action letter which–for any adviser facing an inquiry–is the best case scenario.  Second, FINRA may conclude the inquiry by imposing some low-level discipline, such as a referral to the FINRA staff for additional compliance training or the issuance of a letter of censure, which is non-public but may be considered by the staff in future inquiries.  Third, FINRA may compel on the record or “OTR” testimony from the adviser, which is similar to a deposition, and may refer the matter to its enforcement division for formal discipline before or after the OTR testimony.  Matters referred to enforcement are resolved either through settlement (through an AWC) or through an administrative litigation process before FINRA’s Office of Hearing Officers.

In its 8210 request to Levine, FINRA sought documents and information concerning his potential solicitation of a loan from a customer to fund an outside business activity.  Serious issues, to be sure, but not necessarily fatal to an adviser’s career.  Instead of complying with FINRA’s request for information, however, Levine refused to provide a complete response to FINRA’s 8210 request, thus sealing his fate and all but guaranteeing he would be barred from the industry.  Failing to cooperate with FINRA in the 8210 process is an independent, and extremely serious, violation of FINRA rules.

The reputational damage associated with a permanent FINRA bar is significant, and a bar carries additional consequences advisers may not always consider.  For example, when seeking other forms of professional licensure (insurance, real estate etc.), state agencies often inquire as to whether the candidate has been barred from any other regulated industry.  Thus, a FINRA bar often precludes individuals from engaging in many other forms of business.

It is critically important to consult with experienced counsel when facing a FINRA 8210 inquiry.  Our FINRA 8210 inquiry attorneys and FINRA defense lawyers have a strong track record of success in defending financial advisers in FINRA 8210 inquiries and enforcement actions.  Contact us today for a confidential consultation.