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Case Results

Arbitration Award for Employer and Majority Owners

Arbitration Award for Employer and Majority Owners - sherman law corporation

Brief Summary of Facts and Allegations:

The employer, a small 40 year old family owned broker-dealer, filed an action before the Financial Industry Regulatory Authority (FINRA) against two of its employees, a husband and wife team, requesting that a three person arbitration panel declare that the employees were not owners of the broker dealer at all, let alone majority owners, that the shareholder agreement was unenforceable or no  longer valid and that the employment agreements had expired.

The broker dealer also requested that the panel award them a clawback of compensation paid to the employees following expiration of the employment agreements which it paid under a reservation of rights subject to a ruling by the panel. 

The employees sought a temporary injunction in state court that would declare them majority owners of the broker dealer and an order allowing them to take over the company removing the majority owners of the broker dealer and a hearing requesting a permanent injunction.  The court denied this temporary injunctive relief ordering only a limited order that permitted the employees additional time to take and pass the Series 24 exam which the broker dealer contended was required by law prior to obtaining a majority interest in the broker dealer.

At the same time, the employees filed a lawsuit in state court to obtain majority ownership, remove the current owners, claimed breach of the shareholder and employment agreements and to recoup unpaid compensation, all of which was ordered to FINRA arbitration. Even though all compensation was paid by the broker-dealer, the compensation claim was brought against the majority owners individually. 

Cal Corp Code sec 709 requires a hearing on the permanent injunction within 15 days, unless the parties agree otherwise. In an effort to seek a cost effective solution, the parties agreed to consolidate the injunction and all other issues in a hearing approximately one month later. This meant no discovery would be conducted only an exchange of exhibits. 

After the filing of all claims, the employees alone and through counsel launched an aggressive attack on the broker dealer and majority owners by claiming that the broker dealer and majority owners were engaging in unlawful practices as far back as 10 years earlier which even preceded their employment.

The employees removed thousands of pages of confidential information and not only repeatedly reported them to numerous state and federal regulatory agencies but sent emails and letters sometimes several times a day for close to 14 months claiming retaliation for their complaints, all of which was a distraction and disruption to the business.

Prior to the arbitration which was estimated to be only 2 days, the broker dealer/ majority owners filed motions requesting that the panel bifurcate the issue by deciding ownership first before compensation because the compensation claim would be moot if they were not majority owners, to prevent the employees from introducing all of the irrelevant purported bad acts and unpled claims for retaliation and unfair business practices.

The panel denied these motions and regretted it when the arbitration dragged on for an additional 22 more sessions allowing the employees all the time they wanted which turned out was a colossal waste of time. 

In addition, when the employees would not turn over the documents substantiating their compensation claim, the panel ordered limited discovery.  Approximately a week before the arbitration was set to resume, the employees produced a document dump consisting of over 30,000 pages demanding arbitration resume on time.

After a 3 week continuance, it was shown that the employees’ copied documents over and over and even produced new exhibits at arbitration never previously produced, all of which the panel allowed them to present. 

The Arbitration & Award:

The arbitration consisted of 23 sessions of testimony, oral closing arguments followed by 2 rounds of closing briefs and objections to evidence. The employer closing briefs were over 40 pages each. Over 750 exhibits were introduced by the parties. The employees amended their compensation claim 8 times constantly reducing their claims each time their numbers were refuted. 

On October 28, 2020, the 3 person FINRA arbitration panel unanimously ruled on all issues in favor of the broker-dealer and majority owners holding that they were not owners at all of the broker dealer at all, let alone, majority owners.  The panel wrote:

“…Viewing these contemporaneously executed documents [Shareholders’ Agreement and Employment and Commission Sharing Agreements] together strongly favors a finding that the agreement to purchase company stock was … established that one or both of the [plaintiffs] would obtain a Series 24 “principal” license as a condition precedent to either or both acquiring company shares. Having failed to satisfy that condition within a reasonable time, the [plaintiffs] do not have any legal or equitable ownership interests … and due to lack of consideration, the subject Shareholders’ Agreement and related Promissory Notes are deemed void and unenforceable.”

In short, the panel adopted the arguments in the broker dealer/majority owners briefs that the employees had failed to meet the necessary condition precedents of passing the Series 24 exam as required by law and intended by the parties prior to acquiring shares. In addition, the panel ordered the employees to reimburse the broker dealer $160,578.00 in compensatory damages, including interest, which “represented 40% of the total payments they received” during the period in question, with all the plaintiffs’ counterclaims denied.

In other words, after the employment agreements expired, they were not entitled to continued ownership compensation (all of which was paid under a reservation of rights because the employees and their counsel threatened a retaliation claim). Finally, the panel ordered the employees to pay over $29,000 in costs and the broker-dealer/majority owners $7500 in costs (cost of filing their initial claims) to FINRA. 

Soon after the arbitration, the employees resigned their employment. 

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