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Customer Complaints Revisited; What To Do When The Firm Comes Knocking On Your Door For Payment
n the typical arbitration award, arbitrators assess full liability and damages against all of the respondents - usually the firm and the broker. This is called "joint and several" liability. It allows the customer to choose against whom to collect. Most often, the customer chooses the "deep pocket" - the firm - for payment of 100% of the award.
Sometimes, especially when the broker no longer is associated with the firm, the firm seeks to reconfigure that payout scheme by shifting responsibility (for liability and payment of damages) to the broker. There are two ways that a firm can do so. These are actions for contribution and subrogation.
Some firms have agreements with their brokers regarding contribution. These agreements may provide that the firm can handle the defense of the customer complaint on behalf of both parties (a bad idea for the broker), and that the firm can assess part of the damages against the broker. Nonetheless, such agreements are not required. Whether or not an agreement exists, firms always can exercise their common law right to have an arbitration panel appropriate damages based upon degree of fault.
The close cousin to the contribution action is the subrogation action. These actions do arise by agreement, this time between the firm and the customer with whom the firm is settling. Subrogation agreements provide that the customer assign to the firm any and all of his claims against the broker. The firm thus has a right to sue the broker for damages that it paid to the customer.
In both contribution and subrogation actions, arbitrators will ask the following question. What is the customer complaint and should the firm have discovered the purported wrongdoing though effective compliance safeguards? Clearly, firms know, or should know, about activities such as selling purportedly unsuitable investments, or engaging in purportedly excessive trading. These are areas where the firm certainly owes a duty to supervise. Indeed, as part of that duty to supervise, the firm must approve each and every trade. These cases make weak claims for contribution and subrogation.
On the other hand, there are numerous instances where the firm cannot know of the broker's activity because it is more discreet. Examples are claims of unauthorized trading, forgery of account documents, fictitious accounts or misappropriation of customer funds. These types of activities make stronger claims for contribution and subrogation.
Procedurally, firms need not bring contribution and subrogation actions within the original customer arbitration. Firms can bring contribution actions and subrogation actions simultaneous with or after the customer arbitration. In fact, recently we prosecuted a U-5 defamation case. One of the firm's defenses was that an arbitration panel previously had found the firm liable on a customer complaint, and that the firm was entitled to set-off that award (not even paid) against any of the damages assessed in the U-5 case. Previous to our filing the U-5 case, the firm had not even hinted that the broker should be responsible. Quite to the contrary, the firm vigorously had defended itself (and the broker by inference).
Nonetheless, arbitrators may inquire as to why the firm chose not to sue the broker in the customer arbitration. Moreover, if the firm vigorously defended the broker's action against the customer, why is the firm now claiming that the broker committed wrongdoing? Is this retribution for testifying poorly in the customer arbitration? Is this being used as leverage for some other issues (such as disputes over the broker's book of business or commissions owed)?
In conclusion, when the firm comes knocking on the door for payment, consider what role the firm played in the activities of which the customer is complaining, and how prompt the firm is in coming knocking. Brokers may not have to answer the door.
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Sponsored by James J. Eccleston, an attorney representing stockbrokers, financial planners and
investors nationwide in arbitration, litigation and regulatory matters, and a shareholder with the law firm
Shaheen, Novoselsky, Staat, Filipowski & Eccleston
P.C.(www.snsfe-law.com). This Web site contains material
of general interest. It is neither intended to, nor constitutes, either legal advice or investment advice.
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