Over the years, I have represented many securities brokers in promissory note, or employee forgivable loan, cases. There is no doubt that they are generally tough cases to defend — the stock broker received the money upfront, the promissory note requires repayment when the broker leaves the firm for any reason, and FINRA arbitration panels typically enforce the note in full, often times adding interest and attorney’s fees for good measure.
There are exceptions, however. In a recent FINRA arbitration promissory note case, the panel awarded Morgan Stanley $2.9 million on two unsatisfied notes, but reduced that amount by $1.2 million — the award to the broker on his counterclaim. The final award in favor of Morgan Stanley was thus $1.7 million, with the Panel denying the parties’ requests for attorney fees.
In his counterclaim, the broker claimed that Morgan Stanley wrongfully denied him a lucrative line of business of making loans to high-net-worth individuals and private-equity clients, and essentially took the business for itself. While the arbitration panel did not explain the reason for its decision (which is usually the case), it evidently bought the broker’s argument.
This case confirms what I know to be true after years of representing brokers in promissory note arbitrations: the stockbroker has the best chance in successfully defending a note case where it can be proven that the securities firm has taken sinister steps to deny the broker the ability to engage in a key business line, and seeks to keep the revenues for itself. A classic case of stealing the broker’s book.
Even where there is no self-interested motive on the firm’s part, but where the firm has significantly curtailed, or eliminated altogether, a broker’s business (i.e., he can no longer solicit clients in certain countries or sell certain financial products), this can provide the broker leverage. In the last promissory note case I tried, I convinced the panel to substantially reduce the total award sought, consisting of principal, prejudgment interest and attorney’s fees, based upon my client’s loss of substantial business due to a change in the firm’s syndicate policy. I asked the panel to do what was right and exercise its equitable powers (King Solomon and the baby come to mind), and it evidently did so. An arbitration panel may not always give a complete win to the broker, but history has shown that they will certainly reduce the award.
If you are a financial advisor faced with the threat of a promissory note or employee forgivable loan case, do not give up hope. Depending upon the facts of your case, you might be that next rare win.
David Chase of the law firm of David R. Chase, PA, is a SEC attorney who routinely represents financial advisors and stock brokers in promissory note and employee forgivable loan cases in FINRA arbitrations. For a confidential, no-cost consultation with Mr. Chase, call toll-free at: 800-760-0912, or send him an e-mail: firstname.lastname@example.org.