Stifel, Nicolaus & Co. is clawing back $440,000 from an adviser who was discharged almost two years ago, the latest brokerage firm this month to recoup compensation tied to promissory notes, according to the Financial Industry Regulatory Authority Inc.
Christian Harkness will pay Stifel the balance owed on a promissory note he signed when joining the firm in 2009, a Finra dispute resolution
document earlier this week shows. Brokers often receive a large upfront cash payment when they're hired, signing promissory notes that require them to return a portion of the money should they leave before the end of a multi-year period.
Disputes over the promissory notes often end up in Finra arbitration cases as brokers keep battling to hold onto related cash they receive when joining a firm and for reaching certain performance targets. Odds are that they will lose, and in many cases, end up on the hook for hundreds of thousands of dollars of their former employer's attorney fees.
“Firms tend to win most of the promissory note cases because they are contractual in nature,” said Michelle Ong, a spokeswoman for Finra, a self-regulatory organization for the brokerage industry.
Arbitration panels recently
ordered former Wells Fargo broker Robert Loftus to pay almost $1 million in compensatory damages tied to promissory notes, while Morgan Stanley clawed back $333,000 from a financial adviser, Finra documents earlier this month show.
Mr. Loftus, who was discharged in 2013, owes the firm $930,874 in damages for
breach of a promissory note signed when he joined Wells Fargo in 2009. The panel also decided that Mr. Loftus was also responsible for $300,000 of the brokerage firm's attorney fees.
In the Morgan Stanley
case, the arbitration panel decided that Louis Dworsky must pay the wirehouse $333,000 in damages for failing to pay back money he owed when leaving the firm in 2013, according to a dispute resolution document dated Aug. 8. Morgan Stanley will recoup money tied to four promissory notes he signed in 2007, 2008 and 2009.
Mr. Dworsky, who now works at Zermatt Wealth Partners in Raleigh, N.C., was also ordered to pay Morgan Stanley's attorneys' fees of about $232,000, as well as $13,248 of additional costs, according to Finra.
Nearly every adviser who moves to a new brokerage firm receives some sort of upfront compensation package that's typically backed up by a promissory note, according to Ron Edde, president and CEO of recruitment firm Millennium Career Advisors. The promissory notes were originally introduced as a form of tax relief, as they allowed the broker to spread out taxes owed on the payment over several years instead of taking a hit all at once, he said.
Today they're often viewed as “handcuffs” as they're drawn up as multi-year agreements that require brokers to pay a pro rata portion back should they leave before the notes expire, said Mr. Edde. “It was an unintended consequence of the promissory note.”
Some promissory notes at the so-called wirehouses, or the big brokerage firms on Wall Street, might not expire for seven to 10 years, while independent broker-dealers typically stipulate a shorter time period, according to Mr. Edde.
Mr. Harkness, the former Stifel broker, agreed to pay the firm $440,000 plus interest on the notes, as part of a settlement they presented to the Finra arbitration panel in lieu of a hearing, the dispute resolution document shows. The award was granted by the panel and each party was found responsible for their own costs.
Stifel had discharged Mr. Harkness in December 2014 due to allegations surrounding undisclosed business activities, according to Finra's BrokerCheck. Currently, he's not a registered with any other brokerage firm.
Joel Jeffrey, a spokesman for Stifel, didn't immediately return a phone call seeking comment, nor did Mr. Harkness's attorney, Stephen Morgan at Murphy Desmond in Madison, Wisc.
There were 204 arbitration cases relating to controversies over promissory notes in first six month this year, slightly ahead of the pace set in 2015 when a total 401 cases were heard, according to
Finra data. There were as many as 802 cases in 2012, the data show.
Attempting to win such a dispute with a former employer is a large gamble for a broker, partly because they may be held responsible for the brokerage firm's attorney fees, said Mr. Edde. “It's an expensive proposition because there's a very low probability behind it.”
