Indemnification and Contribution of Customer Claims
Brokerage firms have been known to bring claims against an employee for customer losses even if the firm’s own actions contributed to the setback. Brokers have been blamed for their employer’s improper actions, such as failure to supervise a customer account or urging the customer to purchase securities that resulted in a loss. If the brokerage ends up paying monetary damages or settlements to a customer, it may request a FINRA arbitration to make the broker partially or completely reimburse it for any compensation paid.
If a broker receives notice that they are required to repay their firm for losses sustained by a customer, they should consult an attorney immediately. Charges of improper or unlawful conduct may end being arbitrated by FINRA, and skilled counsel will prevent the broker from unfair penalties.
If a FINRA Arbitration panel finds that the broker was indeed a contributor to a customer’s losses due to professional misconduct, the penalties include fines, suspension of the broker’s registration, and even a permanent ban from holding a job in the securities industry. They may lose their job and have a negative U-5 report that will harm their chances of finding similar employment.
Insider Trading, Securities Fraud and Scheme to Defraud are charges that may arise as the result of a FINRA Arbitration into indemnification and contribution of customer claims, if the losses were related to these activities.
In October 2010 Morgan Keegan & Company Inc filed a FINRA Arbitration Statement of Claim asserting that broker Alejandro Rotundo had, among other things, breached his employment agreement by refusing to compensate the firm for money paid to settle customer claims. Rotundo had allegedly conducted unauthorized trading in a customer’s account, resulting in his termination.
Rotundo denied the allegations of professional misconduct and issued a Counterclaim and Third Party Claim for defamation, breach of employment contract, declaratory relief, and other mistreatment. He sought monetary relief and wanted his form U-5 expunged so that the reason for his termination was noted as ‘voluntary’ and its purpose was to ‘assume employment elsewhere.’
The FINRA Arbitration Panel found Rotundo liable and ordered him to pay $35,525 plus statutory interest to his former employer. But it also declared that Morgan Keegan had defamed Rotundo by using inappropriate language on his Form U-5. The company was ordered to pay $500,000.00 plus statutory interest from the date of the Award until paid in full. The Panel also recommended that the Form U-5 retain the ‘Discharge’ notation as the reason for termination, but change the termination comment to read “Exercising discretionary power in a customer’s account without prior written authorization.”
To avoid fines or sanctions and resist improper indemnification demands, a broker must prove that the customer’s losses were market-related or that they acted expressly under the direction of their supervisor or other high-ranking representative of the brokerage firm. If a customer experiences a loss and tries to seek compensation by saying that there was no firm order, the broker can vindicate themselves if they produce written evidence of a firm order.