Many investors may not be aware of the fact that in the brokerage industry when a stock broker moves from one broker dealer to another, unless he is a poor producer or has been asked to leave, it is common practice for the new brokerage firm to pay the stock broker a “signing bonus” if he is able to convince his customers to follow him.
The amount of this signing bonus is based on the production (commissions, margin interest credits, etc) history of the broker and can be in the hundreds of thousands of dollars (or millions for the really big producer). This is referred to as the value of “his book”.
The firm disguises the bonus to your broker as a forgivable loan. If the broker generates the revenue requirements in the forgivable loan agreement annually, then a certain amount of the loan is forgiven. It does not take much contemplation of this arrangement to arrive at the conclusion that there is an inherent conflict of interest that works contrary to the best interest of you, the broker’s customer.
For example, if the year is coming to an end and the broker has not yet generated sufficient commission income from his customers who followed him to the new firm to qualify for having a portion of the loan forgiven, he is faced with two choices:
- Figure a way to generate activity in the customer accounts to meet the revenue goal and have a portion of the loan forgiven; or
- Face having to repay that portion of the bonus to the firm.
My experience with both the industry and human nature leads me to believe option 1 will be the path taken in most cases. We often see in our cases mutual fund churning, equity churning and the recommendation of unsuitable investments including private placements, non traded REITs , oil & gas investments and limited partnerships that have likely been generated, not to benefit the investor, but rather to generate commissions for the broker and his firm.
What happens when a broker who has received a signing bonus leaves his firm for a new firm with the promissory note unpaid? Prudent business practice would suggest that the broker would pay off the note to the firm he is departing. In real life, many brokers leave for the new firm and are sued in FINRA arbitration by the old firm for the outstanding balance. Their defense is generally based upon allegations that the old firm somehow hindered their ability to conduct business.
In this week’s FINRA arbitration awards there was a spate of arbitrations by firms against their former brokers, including these:
- Wells Fargo v Caio Dean Dunson (Case 10-2139) Dunson had signed two notes in 2005 and 2006 on which he still owed over $800,000 when he left Wells Fargo, and apparently the industry, in 2009. The FINRA arbitration panel ordered Dunson to pay Wells Fargo nearly a million dollars, plus attorney fees and costs. A review of Dunson’s CRD on the BrokerCheck site reveals that he had a number of customer complaints involving misrepresentation of variable universal life policies. Wells Fargo paid hundreds of thousands to the aggrieved investors.
- Ameriprise v Lisa Engstrom Seran (Case 12-2563) Ameriprise requested the $75,000 note balance and interest which the arbitration panel awarded pursuant to a stipulated award between the parties. According to FINRA recoreds Seran currently is registered with Cetera Advisors, LLC.
- Morgan Keegan v Wayne Thomas Altman (Case 11-3624) Morgan Keegan alleged failure to repay commissions related to cancelled annuity sales and to repay promissory notes executed by Altman in 2009 & 2010 and sought $115,000 plus interest on the notes and $5,100 related to commissions. The panel awarded a total of $121,000 to Morgan Keegan. According to FINRA records, Altman currently works for Ameriprise Financial Services.
- Regal Services, Inc. v John A. Cavanaugh (Case 12-980) Regal sought the unpaid balance on a note executed by Cavanaugh in 2007. The panel awarded $71,000 plus attorney fees and costs. Cavanaugh is no longer registered according to FINRA records.
If you have losses in your brokerage account that you believe are due to the negligence or fraud of your broker or broker dealer contact us for a no charge consultation.
Rex Securities Law , located in Boca Raton, FL, provides representation to investors nationwide who are seeking recovery of investment losses due to the negligence or fraud of stockbrokers and broker dealers. If you have questions about how your account has been handled, call to speak with an experienced securities attorney. Most cases handled on a contingent fee basis meaning that you do not pay legal fees unless we are successful.
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