Robert W. Pearce, a Florida based securities lawyer with a practice that includes representation of financial advisors answers one of the more frequently asked questions: How can I avoid repaying my up-front signing bonus?
My name is Robert Pearce. I often receive telephone calls from financial advisors that were recruited by brokerage firms with up-front signing bonuses based upon their production at their prior firm. Now, years later, they want to leave that firm or they left the firm and received a lawsuit or arbitration claim to collect the amount of the bonus, sometimes all of the bonus, sometimes only a portion of it. The basis for these suits are that when the broker signed up with the firm, they signed agreements, employment agreements with bonus and repayment provisions, they signed forgivable loan agreements, or they signed separate bonus agreements and promissory notes. The employer’s purpose was to have the brokers sign these agreements and deter them from leaving the firm in the future, at least for a period of time. Today, the general term of these agreements is six to eight years. These agreements were generally prorated annually or quarterly or monthly, meaning that the longer you stay, the less money you owe.
The recent trend is to use separate promissory notes and bonus agreements. The idea being that if you sign two separate agreements, a bonus agreement, for example, where you receive the bonus and a portion of that bonus you receive is partially vested at year one, year two, year three, year four, etc. and used to repay the note. When you stop your employment with that firm they’re no longer obligated to pay you the bonus, but the promissory note is still in full force in effect and that’s an easy agreement to enforce. It’s like a check, all you have to say is, “Here’s the promissory note, judge; he/she agreed to pay X dollars; he/she stopped paying and still owes us Y dollars.” It’s a simple action to enforce a promissory note in arbitration, and most brokers lose on these promissory note agreements in arbitration.
The only way, in my experience, for you to be able to avoid repaying an employer on an employment agreement, forgivable loan agreement or promissory note is to have a separate claim against the brokerage firm. Hopefully, when you leave the firm, you can identify a claim that you have and it’s a strong claim. If so, what we recommend you do is to file an arbitration claim against the brokerage firm first. You become the claimant, you get procedural rights. You will also have a little bit more credibility if you sue first rather than waiting to be sued by the brokerage firm on the promissory note and then suddenly coming up with a defense or a counterclaim. That doesn’t mean you can’t do that, but our preference is for you to be the first to file.
Now, be aware most of these claims or counterclaims don’t have much success and for good reason. I’ve had brokers come into my office and say: “Well, we were promised something, we were defrauded when we signed up with the brokerage firm, the recruiting broker, and they never delivered. They promised us leads, they promised us an assistant, they promised me a large office. They said that we’ll get all your clients transferred to the firm in no time, don’t worry, and then they failed to do that.” The problem with those types of claims is that brokers just don’t pack up and leave one firm after they signed up and discovered the recruiting firm broke their promises. One would generally know about those broken promises are very quickly. They may leave a year or two or three years later. Then when they get to the arbitration, the arbitrators say, “If these things were so terrible, why didn’t you leave earlier? Why didn’t you leave immediately?” The arbitrators don’t consider the fact that it’s difficult to leave firms and transfer your clients, but that’s the way they will probably think about those claims or counterclaims.
Again, what you need to do is, you need to come up with a strong claim to set off that promissory note, bonus agreement, forgivable loan, or employment agreement. In my experience, the strong cases are where the broker, prior to his employment, has memorialized, in writing, either in the form of correspondence or emails, the false promises or promises that were simply not fulfilled, and/ or makes a claim for fraud and that the broker acts on that claim quickly. I’m talking about within a year generally of joining the new firm.
There are also post-termination defamation claims that can constitute a good set-off claim. A broker leaves the firm, he owes money, and as soon as he leaves the firm, the brokers at the departing firm and the sales assistants are on the line with his best customers and maybe telling all sorts of lies about that broker, lies that may be even sent by email. The problem with those cases is you really need something in writing, and on top of that, you really need your customer to say that, “Listen, if they hadn’t said these things, I would have transferred my account.” Usually, the customer won’t say that unless he’s had difficulties with that firm after you left but it’s a good claim if he/she does back you up.
There are other ways that you can make set-off claims or counterclaims. They’re very difficult, but they’re not impossible. Usually, the better course I find in these situations where the claim or counterclaim is weak is to try to renegotiate with the brokerage firm that you just left; attempt to renegotiate the terms of the promissory note, maybe make them less onerous, by lowering the payment or extending the time period to repay the bonus. You might even be able to negotiate a reduction in the amount owed by making a lump sum payment. Or if you’re really on the verge of bankruptcy, making that known to your former employer, will sometimes influence them in the renegotiation.
Either way, these are difficult negotiations and you need a good FINRA defense attorney to help you and we’re here to help you achieve the best outcome.