Brokers Beware

There Is A Right Way - And A Wrong Way - To Resign

Are you considering resigning from your current firm to join a new one? You probably have signed an employment agreement that restricts your ability to solicit your current clients to join you at the new firm.

Alternatively, if your current and prospective employers are parties to the Recruiting Protocol, there are certain procedures you must follow in order to enjoy the protection the Recruiting Protocol affords resigning brokers.

In either scenario, if you are considering leaving your current firm, you should consult an experienced securities employment attorney before doing so.

Two recent FINRA matters dealt with brokers who resigned the wrong way – and are paying the consequences for doing so. They probably did not consult an experienced securities employment attorney beforehand (certainly not one at this firm).

Christopher D. Stoddard joined Citigroup in the Boston area in 1996. Citi eventually morphed into Morgan Stanley and Stoddard remained there until 2016 when he joined Wells Fargo. His problem? After he resigned from Morgan Stanley, it was discovered that he had changed the telephone numbers and email addresses of four clients in the Morgan Stanley client management system. He apparently left an accurate client list, pursuant to the Recruiting Protocol, when he resigned. However, by changing the contact information for these clients (presumably his four largest), Morgan Stanley was delayed in contacting these customers after Stoddard’s resignation.

Wells Fargo discharged Stoddard for cause in September 2016 upon learning of his improper conduct. Wells Fargo reported the reason for his discharge on a U-5, which triggered a FINRA inquiry. He recently entered into a letter of acceptance, waiver and consent (“AWC”) with FINRA enforcement in which he agreed to a $5,000 fine and a 20-day suspension from the industry.

The basis of the FINRA regulatory action was that Stoddard’s deletion of the contact information caused Morgan Stanley’s books and records to be inaccurate. Furthermore, his actions violated the requirement of FINRA’s catchall Rule 2010 to observe “high standards of commercial honor.”

Stoddard is currently employed at Stifel Nicolaus.

This type of conduct, while not common, is also not unheard of, and was also the subject of a recent FINRA industry arbitration. In a claim filed in October 2015 Southwest Securities (now Hilltop Securities) alleged that five former brokers and a sales assistant destroyed 18,000 records on Southwest/Hilltop’s computer drives and in paper files prior to joining Stifel Nicolaus’ San Diego, CA office.

The claim named Stifel as a respondent, arguing that Stifel aided the individual brokers in their breach of a fiduciary duty owed to their former employer. It also alleged raiding against Stifel, claiming that the six brokers’ $2.5 million in combined production amounted to 30% of Southwest/Hilltop’s San Diego branch revenue.

The panel awarded a total $430,000 to Southwest/Hilltop against four of the brokers AND the sales assistant. The damages consisted of compensatory and punitive damages, attorneys’ fees and costs in varied amounts (a high of $190,000 against one broker, $25,000 against the sales assistant). The award against the individuals was not joint and several; they are only responsible for the specific amount awarded against them.

The claim was dismissed against Stifel.

Southwest/Hilltop requested damages of $18 million (including $11 million in punitive damages) at the conclusion of the hearing. The award was much lower than what Southwest/Hilltop sought; that may be of some comfort to the individuals. However, the claim was completely dismissed against Stifel and the conduct complained of occurred prior to them joining Stifel. Therefore, unless they come to an agreement with Stifel, the four brokers and the sales assistant are responsible for paying the amounts awarded against them.

An article discussing this case states that there may be a FINRA inquiry into the actions of the brokers (its hard to imagine that FINRA enforcement would not look at this matter, given that it alleges the destruction of 18,000 client records).

These matters highlight what can go wrong if a broker resigns in the wrong way. Having seen these types of cases before, we can tell you that the defense of “my clients didn’t want to be contacted by anyone at my former firm so I only did what they asked” will not carry the day for the departing broker. The clients’ phone numbers, email addresses, etc., in the firm’s data system are the firm’s records and they cannot be tampered with. If Stoddard was suspended for deleting the information of four clients, consider the regulatory exposure for the former Southwest/Hilltop brokers if, in fact, they deleted records of thousands of clients.

These matters highlight the necessity for a broker considering resignation from his firm to consult with an experienced securities employment attorney. The attorneys at Lubiner, Schmidt & Palumbo are here to advise a broker of the proper way to resign from his current employer to minimize any litigation or regulatory risk.