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Keeping Your Signing Bonus May Get Easier

Will banks continue to take a hard line on recovering hefty signing bonuses from employees who end up staying just a few years, or less? An ex-Citigroup broker's arbitration win has compensation experts wondering.

A Financial Industry Regulatory Authority panel ruled last month that Lloyd Laughlin, who was terminated in February 2008, was required to pay $20,000 in damages and fees. That's just a fraction of the $142,000 Citi's Smith Barney unit (now Morgan Stanley Smith Barney) claimed he owed on a sign-on bonus he received on joining the bank.

Allan Bloom, an attorney at Paul Hastings, says the financial crisis prompted some banks to aggressively assert rights under employment agreements. "Maybe five years ago when they weren't under so much pressure to cut costs, this may not have been the case," Bloom says. "With someone leaving early, the bank has a right to get their money back."

Brokers Usually Agree to Return Far More Than 20 Percent

While these disputes are common, Finra's latest ruling is anything but. To settle an ex-employer's claim, brokers often agree to return a much larger percentage of their signing bonus - typically one-half to two-thirds.

The industry is a breeding ground for disputed bonuses these days. Brokers, traders and dealmakers are constantly on the move, bringing books of business with them - a theme that persists as Wall Street consolidates after the crisis.

Loren Schechter, an attorney at Duane Morris, says these bonuses are viewed as "withering loans" - a means of inducing executives to join the firm and remain, as the amount owed drops. They are structured so an equal portion of the total loan is forgiven each year.

"This panel seems to have disregarded what I assume was the language of the loan agreement and required repaying only a small portion of the loan," says Robert Sedgwick, an attorney at Morrison and Cohen. "If that's what happened, then it's an interesting result because there appears to have been clear documentation that the broker was supposed to repay the loan. This case would seem to encourage people who don't do well in negotiation to try arbitration. As a result, more negotiations about loan repayment than ever will end up with less repaid, and companies won't be as eager to go to arbitration."

Ruling Doesn't Set a Legal Precedent

Citi faces a similar a class-action suit filed by a group of former advisors. That case involves Thomas Banus, who left Smith Barney with $46,000 remaining on an up-front cash payment in the form of a loan. Attorneys for the brokers argue that Citi's demand to repay up-front cash payments violates contract laws.

Unlike courts, Finra isn't bound to disclose the reasoning behind its decision. So legal experts don't know how far the Laughlin decision might shape future cases. From a broker's standpoint, Bloom cautions, "I wouldn't be pumping my fist if I was looking to invalidate these agreements across the board. Big banks tend to make these agreements water tight and they are valid agreements that have been around for a long time."

AUTHORScott Krady Insider Comment
  • Ke
    10 March 2010

    As a broker who left citi - how do you find the right attorney?

  • Ma
    Mark Astarita
    3 March 2010

    Interesting case, but not unusual. These promissory notes have been carefully crafted by the firms to insure that brokers do not leave the firm until the note is completely forgiven, but recent conduct of the wire houses is changing the landscape. Wire houses are cutting compensation, re-calculating payouts and in some instances, forcing brokers to leave by making it impossible to earn a living. Those facts lead to counterclaims by the broker against the firm as part of the response to the note claim, and brokers who have the right facts, and the right attorney, can prevail.

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