Debra Speyer In The News - RegisteredRep.com, February 1, 2007



On June 12, 2004, Miguel Garcia lost his job at Smith Barney. It brought an abrupt end to a stellar 10-year stint with the firm. The day was unusual from the very start, he recalls. Despite the market being closed for a national day of mourning in honor of the late former President Ronald Reagan, all advisors that worked in the Miami branch were summoned to work. A meeting with the regional director unveiled a promotion to national recruiting director for branch manager Mike Buckner. But at the same meeting, Garcia was asked to meet with Buckner and branch compliance officer Dana Brown at 5 p.m. His stomach churned as he wondered why the meeting had been called.

Later that day, his worst fears were realized. Smith Barney fired the veteran broker for a trading miscue that violated firm policy. He was told to clear out his desk immediately, and to relinquish his BlackBerry, laptop and security key card on the spot. (He was “permitted to resign,” according to his U5). His career was in tatters. He lost nearly his entire $150 million book of business, couldn't find work at a major firm and had his reputation sullied. All because he had submitted a trade order ticket to the back office three minutes late.

Garcia couldn't believe it: He had been one of the branch's best producers and had received numerous accolades for helping the branch double its production. As an international financial consultant (IFC) for Smith Barney, where he had worked since 1994, Garcia was at the top of his game. He ranked among the top 10 brokers in a fiercely competitive branch and in the top 5 percent of all IFCs, with a book of more than 500 accounts, mostly from Mexico, Argentina and Spain. Garcia, a mild-mannered, polished broker enjoyed working for Smith Barney. He had no intention of leaving, despite receiving recruiting calls from rival wirehouses like Morgan Stanley and Merrill Lynch. He was a company man.

Despite his initial confusion over why he was fired, Garcia moved on and began applying for jobs at other firms. But when he picked up a copy of The Wall Street Journal in July, he learned that the Miami branch had been under investigation for delayed allocation of trades. Specifically, several brokers and the branch manager were slapped with enforcement actions that included fines and a suspension for one of the brokers. His violation of company policy had occurred just days after these employees reached a settlement with NYSE Regulation. That's when he started to put the pieces together and to suspect that there was something fishy about the whole thing.

So, in June 2005 he filed a complaint against the firm, alleging that he was a scapegoat for the branch's regulatory woes, busted on a technicality to get the branch manager off the hook for lax oversight. Buckner, the BOM, was hit with a failure-to-supervise penalty by the NYSE for allowing hundreds of delayed allocations of trades by several brokers from December 1997 through March 2001. Garcia was not named in the action.

Garcia alleges that company policies were selectively enforced to make an example out of him. A violation that had been previously treated as a slap on the wrist, incurring a $100 fine, suddenly became a fireable offense. (Big producers, including Garcia, didn't care about a $100 fine on one ticket when they were doing a million in production.)

“It's definitely scapegoating,” says Michael Arias, one of Garcia's attorneys from the law firm Carlson & Lewittes in Miami. “There were other brokers in the branch who continued to drop tickets late.” This was revealed in discovery when notices to those brokers were dated after Miguel was let go, he says. (Garcia was prohibited from being quoted in this story by his current firm, EFG Capital International.)

After a bruising legal battle, an NASD arbitration panel agreed: In December 2006 — two-and-half years after Garcia was fired — the panel ruled that Garcia was “treated disparately from other employees and that he did not receive the level of management assistance accorded to other employees.” As a result, Smith Barney was ordered to pay him $1.82 million in compensatory damages and another $1.75 million in punitive damages for a total award of $3.57 million.

Smith Barney, however, denies any wrongdoing, and has since moved to vacate punitive damages (although it is paying the compensatory damages, less some back-pay taxes). “Smith Barney remains confident that it treated Mr. Garcia in a lawful and legitimate manner,” said spokeswoman Katrina Clay in an emailed statement. “We strongly disagree with the arbitration panel's award and have asked a court to vacate a significant aspect of it.” The firm declined to discuss details of the case, citing its policy on personnel moves.

Whether you care about this particular rep's career or not, the case has lessons for all: It shows that no matter how insignificant the transgression might be, violating company policy can cost an advisor plenty. Even though the arbitration panel found that Garcia was mistreated and given little support for his business, he found himself in a precarious situation because of the trading miscue. On the other hand, arbitration panels are sending a message to the firms that mistreating brokers and pinning firm problems on an individual will not be tolerated, say some plaintiffs' attorneys. “The fact that this panel awarded $1.75 million in punitive damages and gave a reason that they did so — because the claimant was treated disparately from other employees and did not receive the level of managerial assistance afforded other employees — strongly suggests that this panel was outraged by the respondent's behavior towards this particular financial consultant,” says Debra Speyer, a securities arbitration attorney in Philadelphia.


In 1995, Garcia began to build his practice like any other newbie rep: through cold calling and networking. His background and fluency in Spanish made him a natural fit for Smith Barney's offshore unit. And Smith Barney even sponsored his visa so he could work in the U.S. Armed with an economics degree from the Universidad Complutense de Madrid, an internship at Prudential and an MBA from the University of Miami, he was well equipped for a career as a financial advisor.

Garcia specialized in fixed income, capital growth and option-trading strategies for high-net-worth investors, business owners, banks and mutual funds. At his peak, he had $150 million in assets under management and was doing $1.4 million in production. Perhaps the biggest account he had early on was Bital, Mexico's fourth-largest bank. The account generated numerous referrals over time, fattening his book of business and raking in sizable commissions. Within four years, he was in the top half of the branch (ranking 16 out of 36 advisors) and had qualified for the firm's prestigious President's Club, a distinction reserved for advisors with more than $850,000 in production.

By May 2001, he reckoned he had increased his production 16-fold from his rookie year. Of course, he worked for it. In the little spare time he had, he spent it training for marathons, running 17 races in both the U.S. and Canada. Senior management recognized Garcia as a broker of “extraordinary ability” who attracted the most successful entrepreneur clients, driving revenue growth for the branch, according to the complaint.

He had once been described in a personal letter from Smith Barney Vice Chairman Paul Underwood as among the firm's “high-quality, highly productive people.” He was praised as being “one of the best in the business” and told that his client base was the “lifeblood” of Smith Barney's international unit. In the first five months of 2004, prior to being pink-slipped, he generated $524,000 in production.


Garcia's fortune started to change, however, when market conditions went south. He was in a highly specialized corner of the marketplace that was extremely profitable but volatile. Emerging markets became a bad place to be in 2000, and Smith Barney grew concerned over its exposure to that area, Garcia's lawyer says. The Argentine debt crisis spooked both investors and brokerage firms about Latin America. Mexico had its own political and economic issues that culminated in the devaluing of the peso. As a result of this turmoil, in 2002, the branch began reviewing Garcia's book to determine if there needed to be an adjustment to his clients' risk profile. That was the first strike against him, albeit something that was somewhat beyond his control.

Buckner also began to view Garcia as a complainer, Garcia's attorneys say, due to his repeated pleas for better sales support. He had been sharing a sales assistant with three other brokers, and even when he did have his own SA, she was unlicensed, unqualified or unwilling to work the hours required, his lawyers charge. As a million-dollar producer, he expected a better level of support. He often had to run tickets up to the back office to be time-stamped and submitted to the wire operator, his attorneys say. When he complained that he was getting bogged down with administrative work, Buckner said help was on the way. But it never came. Later, Garcia's attorneys say, his pleas for help were used to make him look like he couldn't work well with others. Meanwhile, as the number of reps in the branch increased from 25 in 1995 to 51 in 2000 and the branch's profitability increased, Buckner became more and more detached from his reps, Garcia's attorneys say.

Eventually, internal auditors came across a $13,000 ticket for an IRA rollover Garcia had executed. The ticket was late by three minutes. Garcia says that it was all an honest mistake, which arose because Smith Barney was in the process of converting to a new technology platform for its advisors. The old system did not support automatic entry of orders for emerging-market debt. These trades had to be done manually, with the broker physically handing the ticket to the wire operator. But the new system made the procedure for entering such orders the same as for making ordinary trades — the broker could execute it through the desktop.

Garcia says the trader never made him aware of the change: Garcia was late in delivering the ticket to the wire operator, which had to be done within 15 minutes of getting off the phone with the trader, according to firm policy. Garcia, was three minutes late. He blamed having to run the ticket to the operator himself and the fact that he didn't realize how much time had elapsed. An honest mistake, he thought.

He also scribbled the wrong time on the ticket. This was his second offense related to time misrepresentation. The firm had been fining brokers $100 for submitting manual trade orders late and, in some cases, reversing the broker's commission. However, it was not expressly against NYSE or NASD rules, which call for best execution on behalf of the client. Under NYSE Rule 410, executed orders must be delivered to the wire operator in a timely fashion. The firm had decided that meant 15 minutes. (The security in question, however, was listed on the American Stock Exchange, not the NYSE). As a result of his late tickets, Garcia had his phone privileges taken away, forcing him to execute all phone orders in front of a manager. A few weeks later, the meeting was called and he was let go. The firm aggressively pursued his accounts, with a good portion of them distributed to Fernando Morillo, a broker who had been fined and suspended by the NYSE, the complaint says.


Meanwhile, unbeknownst to the brokers in the branch, trouble was brewing. The NYSE notified Buckner that he was the subject of an investigation on Aug. 23, 2002. The investigation was prompted by customer complaints about a broker who was fired in March 2001. Previously, a broker named Quinto Perichon was suspected of churning, unsuitable speculative investments in tech stocks and unauthorized trading. Perichon was fired in March 2001 and was barred from the industry. During its probe, the NYSE also found systemic late allocations.

On June 2, 2004, the NYSE hit the firm with a $250,000 fine and censure and slapped individual enforcement actions against Buckner and Morillo, who were fined $100,000 and $70,000, respectively. Morillo was suspended for one month without pay. Just eight days after Buckner signed off on his settlement with the NYSE, Garcia was fired for a late ticket he had submitted on April 20.

According to the action against Buckner, he failed to supervise brokers who were holding on to tickets to give preferred clients the securities when they performed well. According to NYSE documents, between December 1997 and March 2001, Perichon and his partner Morillo, as well as other registered representatives who were subject to Buckner's supervision at the Miami branch, improperly delayed the allocation of customer trades. In addition, under firm policy, reps cannot place an order unless the account name and number of shares for each account are known at the time the order is placed with the trading desk. The NYSE found that the delays ranged from 20 minutes to 24 hours. In May 2000, the Miami branch had 423 late allocations, 154 were related to Morillo and Perichon.

When the brokers submitted a bulk order to the trader, they didn't tell the trader the account numbers upfront. Rather, they waited to see how the securities performed to determine which clients would get them. The NYSE found that brokers at the branch were timing order entry to favor certain clients, holding tickets until there was price movement in the security, then allocating them. Smaller customers got execution when there was no advantage for preferred customers.

The firm, aware that it was being investigated, issued warnings to all of its brokers about curbing late allocations but never took a strong stance, say Garcia's lawyers. The warning stated that brokers would be terminated if they failed to follow branch instructions, according to Smith Barney's motion to dismiss. Buckner, the BOM, saw it as a recurring problem, according to the motion to. In that same motion, Smith Barney cited Garcia's 11 customer complaints over unnecessary exposure to risk and 14 late-trade allocation tickets, two of which were stamped with the wrong time. On Garcia's U5, however, there were only two customer complaints in 10 years.

The firm also stated in its motion that Garcia was on special supervision, which later proved to be false. That actually requires the NASD and NYSE to be notified. He was on “heightened supervision,” which means very little to regulators.

The difference between what Morillo had done to warrant the fine and suspension and what Garcia did was that he told the trader the account numbers, whereas Morillo didn't. There was little or no advantage gained for Garcia on an IRA account.

As for Garcia, he believes the rules were selectively enforced. “It's all politics. The firm needed to set an example,” his attorneys say. “It needed to show it was taking measures to curb the problem that was happening, which he didn't even know about until he read it in the Journal a month later.” The newspaper ran a blurb in its disciplinary actions section on July 13 that announced that Smith Barney and several employees in the Miami branch were fined for delayed allocations. Buckner did not return phone calls seeking comment.

The damage to Garcia's career was significant. It took him three months to get an offer from another firm. He lost most of his $150 million book, which even today stands at only $58 million. Currently, Garcia is a broker at EFG Capital International, a Swiss bank with a brokerage operation in the U.S. He works in the same building as he did when he was with Smith Barney, just several floors below. Despite landing a new job and winning a $3.5 million award in arbitration, his business has been injured, and he can't get hired at one of the big wirehouse firms, his lawyer says. And his record has still not been expunged of the “permitted to resign” language.

His lawyers say that departing brokers are repeatedly getting the shaft. “For years, firms have treated registered reps as disposable Dixie Cups, where they keep the juice the rep has gathered over the years and throw the rep away like a crumpled cup,” says Curtis Carlson, one of Garcia's attorneys and a partner at Carlson & Lewittes. “This panel understood that the registered representative is a human being that you cannot treat in that manner and that the rep has an ownership interest in the book, which the firms cannot take away without fair compensation.”

What's worse is that the individuals who were fined by the NYSE got to keep their jobs while Garcia, who committed what appears to be a far less serious infraction, was sent packing. But attorneys for the brokerage firms would say that this is the “everybody else was doing it” defense.

Simultaneously, Buckner was promoted and Morillo got handed Garcia's accounts. One Smith Barney branch manager from another branch said that he would have handled the situation differently, issuing a letter of education or a letter of caution. Without being familiar with the details, he viewed the decision to remove Garcia as drastic. “I wouldn't do that to one of my guys,” he says.

A Problem With Fairness?

Many advisors feel that arbitration is tipped in favor of the brokerage firms, but Garcia's victory suggests that brokers who have been wronged can fight back — and win. Panels are awarding punitive damages when a broker's career has been jeopardized. “It's becoming less unusual,” says Dave Robbins, an arbitration attorney and partner at Kaufmann Feiner Yamin Gildin & Robbins. “To have his life destroyed by this indifference to the consequences will give rise to punitive damage awards,” Robbins says. Brokerages have absolute immunity when submitting a broker's U5. It is currently tied up in the courts as to the extent of a firm's immunity (qualified or absolute) when there is wrongful termination.

The lesson that can be learned from this is the fragile nature of employment and how being fired for a small, firm violation can damage a rep's business — no matter how important the FA thinks he is. “It shows the tremendous influence firms have to destroy brokers,” Robbins says. “It shows that the code of conduct that a firm expects of its brokers should be followed by the firms themselves. What panels are saying nationwide is that you must treat brokers with due respect.”

Speyer disagrees with Robbins as to a burgeoning trend of broker awards, saying the case is more of an anomaly and that the arbitration panel's decision reflects the firm's egregious behavior. “This is not a trend. This is a unique situation that really outraged the panel,” Speyer says. A way to avoid becoming a patsy at your firm, Speyer suggests, is by documenting everything. If you have requests for better sales support, put them in writing and keep a detailed log of the responses you receive, she says.

Attorneys who represent firms scoff at the notion that firms abuse the U5 process. “The idea that a firm would invite a lawsuit by saying something reckless or untruthful on a U5 is ridiculous. There's too much at stake,” says Phil Berkowitz, an employment lawyer and partner at Nixon Peabody. “Sometimes it's hard for brokers to come to terms with that the fact that there may be shortcomings in their performance.” An in-house attorney at a major wirehouse defended its U5 procedures: “We have a very robust vetting process when it comes to the U5. We're mindful of the impact on the broker's career, and we don't use punitive or pejorative language.”

Garcia's tale of woe is just one advisor's story of how a firm damaged his reputation and took his book of business. Garcia's camp contends that he is effectively blackballed from working at any of the top firms, who prefer to hire reps with pristine records. Given that reality, brokers must pay strict adherence to firm protocol, no matter how loosely applied it may seem, because it will inevitably come back to haunt them.


Mitchell Slater was another successful broker who says he got bullied by a wirehouse firm and one of its branch managers. Slater was a $10 million producer with a clean record when he decided to leave Merrill Lynch (voluntarily) after 18 years with the firm. But when Slater opted to take a sign-on bonus to join Smith Barney and transfer his book of business, branch manager Thomas Fickinger allegedly launched a smear campaign that nearly cost him his career — and his good name. The case further illustrates the power firms have to cripple a broker's career even when statements made on his U5 are proven false.

Among the list of injuries, Slater claims, Fickinger solicited a complaint against Slater from one of Slater's biggest clients — an assault that left Slater with a blemish on his U5. The customer complaint alleged that Slater “recommended unsuitable investments, took discretion and churned the client's accounts.”

According to a complaint Slater filed against Merrill, the firm would not release the customer from a confidentiality agreement, preventing Slater from speaking with the client and responding to inquiries from regulators. In addition, Merrill withheld his commissions for his last month and claims he owes money for management fees, Slater says. The company has since sent the disputed balance to a collection agency and is threatening to report him to credit-reporting agencies in an attempt to destroy his credit, the complaint says.

These difficulties put Slater in a precarious position with his new employer, as he's had to provide explanations to branch management, compliance, in-house auditors, the NASD and two state securities regulators, he says. “The process has been embarrassing, time consuming, costly but mostly emotionally painful,” the complaint says. “Not only did Merrill solicit an absurd complaint against Slater where one did not exist, it has caused irreparable damage to a longstanding and profitable client relationship.”

Attorneys who represent brokers in cases against their firms say Slater's case is not unusual. “The use of defamatory language on a broker's U5 is widespread on Wall Street,” says Jacob Zamansky, principal of Zamansky & Associates, a leading plaintiff's securities arbitration firm. “When a departing broker leaves, firms use the U5 as a weapon to prevent a broker from going to another firm and to keep his book of business. The U5 is being used for wrongful competitive purposes and vindictive purposes by managers who dislike a departing broker,” he says.

An NASD arbitration panel ruled in favor of Slater and ordered his U5 expunged. However, the panel did not grant Slater a monetary award. “The NASD arbitration panel's award is a vindication of Mr. Slater's claims,” says Slater's attorney Brian Neville. “Brokerage firms (including Merrill Lynch) seem to think that they can put permanent entries on a broker's record (CRD) without justification. These wronged former brokers face costly arbitration proceedings and case law that is very protective of the brokerage firms in their efforts to clean up their CRD. Time and again arbitration panels reject the various defenses raised by these firms.”

Merrill disputes that it coerced a complaint from the client. “During the hearing, one of Mr. Slater's clients testified that he, the client, had come to our offices with his accountant and complained to Merrill Lynch that Mr. Slater had mishandled his account,” says Merrill spokesman Mark Herr. “While the panel ordered the U5 changed, it also refused to award Mr. Slater damages.”

— KB

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