September 11, 2002
By Lynn Cowan
The Wall Street Journal
WASHINGTON — When William Roche lost his job as a broker at PaineWebber earlier this year, he had more than the end of a steady paycheck on his mind: His former employer said he owed the company $78,000.
Mr. Roche is in the same position as many other down-on-their-luck stockbrokers who were recruited to firms during the height of the bull market, and are now jobless in a bearish market. Eager to attract talent, brokerage firms in recent years offered the recruits special incentives known as employee forgivable loans, sometimes for hundreds of thousands of dollars. The loans weren’t outright signing bonuses — if the employees quit or got fired prior to a predetermined date, they were contractually obliged to pay back the balance of the loan. After two years of falling markets and risk-averse investors, those balances are coming due as more brokers leave the industry on their own or are forced out.
“Some of these guys are having a terrible time when they can’t get another job and pay it back. It can put quite a burden on them,” said Ronald G. Blum, a securities attorney at Kalkines Arky Zall & Bernstein, who said neither brokers nor firms anticipated such a sharp downturn in business so soon after the loans were granted. “But I wouldn’t characterize it [forgivable loans] as good or bad. It depends on the broker.”
Mr. Roche, a 40-year-old Somerset, N.J., resident, said he was forced out of PaineWebber, a unit of Zurich-based UBS AG. In 2000, he joined PaineWebber’s Florham Park, N.J., office from JB Hanauer & Co., where he had accumulated accounts totaling more than $10 million in assets, he said. As part of his inducement to join PaineWebber, Mr. Roche said he was offered a loan of $98,671, to be forgiven in equal parts over its five-year life.
A year later, with his commissions down by a third and the markets continuing to fall, Mr. Roche said PaineWebber gave him less than 60 days to sign up 12 new customers and increase his assets under management by at least $2 million. When he failed to do so, the firm gave him 17 more days to open 12 new accounts and to increase his assets by at least $2.33 million, he said. When he failed to meet the second set of goals, he was asked to resign, he said. He refused, was fired, and PaineWebber has kept his client book while it awaits repayment of its loan, he said. PaineWebber declined to comment on Mr. Roche’s tenure at the firm or the reason for his departure.
“They put numbers on me that were blatantly unreachable in a very short time in this type of economic environment, or any environment,” said Mr. Roche, who is trying to build his business from scratch with a new brokerage firm, First Montauk Securities Corp.
Although Wall Street firms avoid wholesale layoffs of stockbrokers even during tough times, many have been aggressive in nudging employees they deem lower producers out the door this past year. Merrill Lynch & Co.’s broker count was 15,100 at the end of its second quarter, down 8% from the beginning of the year. Morgan Stanley’s brokerage force was 13,707 at the end of its second quarter, down 4% from the second quarter of 2001, and PaineWebber’s was 8,326, down 5% from last year.
In the process of paring brokers, brokerage firms are getting stiffed on the forgivable loans that they offered during more-bullish times. The vast majority of the average 500 arbitration cases a month that are decided by the National Association of Securities Dealers involve individual investors accusing brokerage firms of mishandling their accounts, but securities lawyers say forgivable-loan cases are now outpacing unfair-competition cases filed by firms against their former employees. The NASD, which handles the majority of disputes in the brokerage industry through its arbitration process, doesn’t compile statistics on cases filed by employers against their employees.
Mr. Roche said he decided not to wait for PaineWebber to file against him. Instead, he lodged an arbitration claim that he was wrongfully terminated and that PaineWebber breached the contract he signed when joining the firm.
Mr. Roche’s attorney, John DeLaney Jr. of Cooper Rose & English, said he will ask the arbitration panel to forgive the balance on the loan and to award punitive damages against PaineWebber.
“You can’t change the rules like that midstream,” Mr. DeLaney said of Mr. Roche’s production goals.
Mr. Roche’s attempt to annul his forgivable loan contract is likely to be an uphill battle, say securities attorneys. Of the 28 employee loan cases involving brokers decided by NASD arbitration since February, all but six were won by the firms. In the few cases in which employees win, it is usually on the basis that they were wrongfully terminated or fraudulently induced to join a firm — difficult claims to prove.
“There has to have been some misrepresentation made that induced the employee to come over in order to void [a forgivable loan] out,” said Lawrence L. Klayman , an attorney at KlaymanToskes. “For example, a high producer with a substantial client base is promised the best equipment and staff to join a new firm, but only gets a phone and a desk.”
Last year, in a case decided by an arbitration panel, broker Michael A. Manfredi received back pay and a punitive award against Dain Rauscher Inc., which hired him in 1997 based on his gross-trading-commission production. Mr. Manfredi said the firm fired him less than three years later after giving him 60 days to shift from charging commissions to a fee-based business model. In that case, he said, the weekly performance reviews that the firm promised never occurred, and Mr. Manfredi was fired before the 60-day period expired. Dain Rauscher declined to comment on the case at the time.
But Mr. Manfredi’s verdict was an exceptional one. Most cases are found in favor of the brokerage firm, primarily because they boil down to simple contract law: When brokers are given the money, they sign contracts stipulating that the loans won’t be forgiven if they are fired or quit before the life of the loan expires. In some cases, the contracts also are drafted with language that puts the onus of both parties’ legal expenses on the broker, should a dispute arise.
“Sometimes, [brokers] either don’t listen carefully or they don’t really understand” that the loans will come due even if they are fired, said securities attorney Ronald Blum. “From a broker-dealer point of view, this is an inducement to come work here for a period of time — it’s not just a gift.”