Last month a FINRA arbitration panel in
Boston issued a reasoned award in an employment matter pitting a former
employee against the bank. Ironically,
both the employee and the bank requested a reasoned award. A reasoned award is pretty rare as the FINRA
member almost never requests one and both sides must request the reasoned rather
than typically scant and unjustified written award.
Beyond
issuing an extremely incriminating award, the panel gave the Claimant every penny
he requested - - over $1.3 million. The
Claimant was a former Senior Vice President in the bank’s regulated
broker-dealer division. The reasoned
award set forth the facts that justified the award as follows:
Claimant
was responsible for the activities of approximately twenty-two sales
representatives who, among other things, sold and recommended the sale of
regulated securities products. Within
one month to six weeks after commencing his employment with Respondent
Santander, Claimant became aware that one of the sales representatives
reporting to him did not have the appropriate licensure to recommend and sell
products in that the particular representative had repeatedly failed the Series
65/66 examination and had, in fact, ceased taking it. That person is referred to as
“employee”. At the time Claimant
discovered this, the employee had a book of business of approximately $50
million, approximately 35% of which was products requiring the Series 65/66
license.
Claimant
reported this matter to the compensation staff at Santander inquiring as to why
it was the employee was being paid commissions on the sale of products
requiring the Series 65/55 license when he did not have one.
Claimant
was told that the employee was one of the approximately nineteen individuals in
Respondent Santander’s employment who were “grandfathered” under an
unidentified loophole in Massachusetts law which allowed unlicensed individuals
to sell managed products. Respondent
Santander’s compensation staff agreed the “loophole” was no longer applicable
and that Respondent Santander had to do something about the issue. Respondent
Santander never provided any documentation of the “loophole” or any indication
as to what period of time that “loophole” would have provided authority for
unlicensed individuals to sell managed products. The employee was employed by Respondent
Santander since 2012.
Respondent
Santander had created and continued to maintain a series of internal
“partnerships” where a licensed individual recorded transactions in products
requiring the Series 65/66 license for the customers of unlicensed individuals
in order to ensure that the transactions would occur and that any automated
reporting system to prevent transactions in products requiring the Series 65/66
license by unlicensed individuals would not be triggered. The employee’s “partner” was a regulated individual
who is still employed by Respondent Santander.
The
“partnerships” and the circumvention of automated exception monitoring in the
regulated product trading software was augmented by Respondent Santander’s
maintenance of a manual system of splitting commissions on regulated product
sales where unlicensed individuals were involved in the transactions. In the particular “partnership” between the
employee his partner, commissions on managed product transactions were manually
split 50/50 between the two of them by Respondent Santander.
Claimant
followed up with Respondent Santander’s management and compliance staff and the
employee was a subject of monthly conversations with the compliance
department. As a result, just before
Christmas 2014 Respondent Santander ended the practice of manually splitting
the commissions on managed product transactions the employee was involved in.
Despite
the termination of the payment of commissions to the employee on managed
product transactions, his customers were never advised and he continued to
counsel customers on transactions requiring the Series 65/66 license through
the end of his association with Respondent Santander.
For
several months beginning in November 2014 there was a series of meetings,
telephone conference calls and electronic mail communications regarding the
employee’s attitude and performance. In
spite of months of communications including learning that the employee had
posted pictures on the Internet of him posing in aggressive stances with automated
weapons, Respondent Santander did nothing but record copious notes of these
issues to no avail.
Finally,
the Customer Complaint & Disciplinary Committee determined in an August
2015 meeting that for this and a series of other reasons, the employee’s
employment be terminated. Meanwhile, Claimant continued to discuss the fact
that the employee maintained a book of business including transactions in
managed products and that his customers were unaware they were being counseled
by an unlicensed person.
On
September 21, 2015, nearly 11 months after conversations about the employee’s
performance issues commenced and after a meeting where the termination decision
arrived at by the Customer Complaint & Disciplinary Committee in August was
to be delivered to the employee, the meeting was cancelled by Respondent
Santander. The employee was instead sent
a letter by Respondent Santander indicating that his failure to report to work
since September 2, 2015 and his failure to log into his computer and any of the
“securities systems” since July 9, 2015 was considered to be job abandonment
and a voluntary resignation of employment.
This determination allowed Respondent Santander to report the employee’s
separation from Respondent Santander on the U-5 as a resignation to FINRA and
his customers thus avoiding any implication arising from his lack of licensure.[1]
On
September 23, 2015, Claimant was called in a meeting at which his employment
was terminated without prior notice, warning or any explanation. No letter stating the reasons for Claimant’s
termination was provided. And yet, Respondent
Santander’s disciplinary policy contains five potential steps of warnings,
notices and progressive discipline. With
regard to the employee all of these steps were followed, in many cases,
repeatedly. With regard to Claimant none
of these steps were followed.
The
Panel noted further that, at the time Claimant was hired by Respondent
Santander, the sales group he was hired to manage had the third lowest
performance level of Respondent Santander’s groups in the comparison. At the time Claimant was terminated by
Respondent Santander, the sales group he was hired to manage had the third
highest performance level of the groups in comparison.
During
Claimant’s employment, Respondent Santander faced a series of FINRA complaints
and investigations for failure to supervise its sales staff in connection with
Puerto Rico public debt. Those matters
ended with fines of several million dollars.
The
fact that Respondent Santander’s records contain none of the documentation its
disciplinary policy mandates be created and which its witnesses stated was
normal business practice, creates an inference that Claimant’s employment was
terminated for an illegal reason. According
to the Panel, this inference was bolstered by the lack of credibility of most
of Respondent Santander’s witnesses and the amazing lack of candor of its
witnesses.
The
Panel determined that the termination of Claimant’s employment was principally
motivated by retaliation for his reporting the violation of FINRA rules to
Respondent Santander’s management and his pressing for their resolution in the
face of Respondent Santander’s determination to avoid exposing the fact that it
was managing a process of subverting its securities software package and
allowing unlicensed individuals to effect transactions which required
licensure.
Ouch! And thus my dear Reader, you now know why FINRA
members almost never ask for a reasoned Award, and why FINRA should change its
rules to require one when requested by either party. Food for thought.
[1] Several years ago
I represented a financial advisor in a U-5 defamation case in Louisville that
was in a situation similar to the employee’s, and he won millions for having
been told about the same non-existent loophole.
He was terminated after the regulators challenged his lack of sufficient
registration. My client had taken but
failed the 65 before he was terminated, but after the regulators made their
challenge.
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