A FINRA arbitration panel ordered securities brokerage firm, Robert W. Baird & Co. to pay Wells Fargo Advisors $23 million for “raiding” its branch in Wichita, Kansas. $10.9 million of the award consisted of punitive damages and $1.8 million in costs.
So, what is a “raiding” case?
Recruiting brokers is part of the securities business. But, when a competitive brokerage firm hires a sizable number of employees from a branch, thereby substantially damaging the bottom line of that branch, that conduct may constitute “raiding.”
A branch may be wiped out overnight by having a rival firm recruit a substantial number of employees, after hundreds of thousands and sometimes millions of dollars invested to increase that branch’s productivity.
“Severe economic impact” from intentionally hiring at least 40 percent of a branch’s unit production may be an element to establish a claim. Another factor is the time duration within brokers switched firms. Brokers transferring firms within 30 days together is different from migration over the course of a year. The longer the interval, the less success in proving a “single hiring plan.”
Brokers who are sued may assert the “sinking ship” defense. The brokers were unable to continue to earn a livelihood because of mismanagement of their former employer. The defense alleges their former employer constructively discharged the brokers. To establish this defense, the brokers must convince an arbitration panel that working conditions deteriorated to a point which they were terminated. Factors, such as reduction in staff, research, marketing are scrutinized. Brokers’ reduction in compensation at the former employer is relevant if the change was within management’s control.
Another defense asserted by brokers sued by their former brokerage firm is the “unclean hands” defense. Unclean hands is an equitable defense in which the defendant argues that the plaintiff is not entitled to obtain an equitable remedy because the plaintiff is acting unethically or has acted in bad faith with respect to the subject of the complaint. In the securities arena, brokers assert the raiding claim should be denied because their former employer engaged in similar conduct “recruiting” brokers. In essence, “what is good for the goose, is good for the gander.” The United States Supreme Court ruled in Keystone Driller CO. v. General Excavator Co., “It is one of the fundamental principles upon which equity jurisprudence is founded, that before a complainant can have a standing in court, he must first show that not only has he a good and meritorious cause of action, but he must come into court with clean hands.”
When considering switching firms in a group transition, make sure you are aware of the entire scenario, not only how your departure will affect the branch, but how the team’s departure impacts the firm’s revenue.