As any Wall Street litigator knows, in the securities industry, it is typical for brokerage firms to incentivize their employed financial advisers with significant upfront compensation at the beginning of a relationship or even at the beginning of each new financial year. These up-front payments are often structured as “forgivable loans” and memorialized in promissory notes. However, if the employment relationship ends prematurely or the financial advisor fails to meet certain objectives and obligations such as revenue goals, repayment obligations can be triggered. Not surprisingly, litigation stemming from these promissory notes is commonplace before the Financial Industry Regulatory Authority (FINRA) in its arbitral forum, and these arbitrations only increase in volume as we step into more turbulent economic times when layoffs and resignations become commonplace in the industry.
One recent promissory dispute was in UBS Fin. Servs. Inc. v. Harrison, No. CV-22-00386-PHX-DJH, 2023 WL 3178866 (D. Ariz. May 1, 2023). In this action, the defendant was a former-employed financial advisor at UBS Financial Services, Inc. (UBS). During his UBS employment, the defendant obtained seven upfront “forgivable loans” totaling $897,104.84. In connection with each of these loans, he executed seven promissory notes, each containing an arbitration clause requiring the parties to resolve employment disputes through FINRA arbitration.
As alleged, under the promissory notes, Harrison’s loans became immediately due and payable to UBS upon his voluntary resignation in September 2016. As also alleged, Harrison failed to make the required repayment. This in turn prompted UBS to file a FINRA claim seeking to recover the unpaid balances.
Following evidentiary hearings, a FINRA arbitration panel issued an award in favor of UBS for the remaining unpaid balance on the loans, together with interest, attorney’s fees, and costs.
On March 14, 2022, UBS filed the federal action in the U.S. District Court for the District of Arizona to confirm the FINRA award under Section 9 of the Federal Arbitration Act (FAA) and convert the award into an enforceable judgment.
Ultimately, the defendant did not respond in the federal action and UBS then filed a motion for entry of default judgment. However, although the motion was not opposed, the District Court concluded that it could not render a default judgment in favor of UBS due to procedural defects in the application. Specifically, the Court stated that to obtain confirmation of an arbitration award, Section 9 of the FAA requires the moving party to file: (1) the agreement to arbitrate; (2) the award; and (3) each notice, affidavit, or other paper used to confirm, modify, or correct the award. Here, UBS failed to provide the Court with copies of the alleged arbitration agreements contained in the seven promissory notes as required by the FAA. Accordingly, on May 1, 2023, the Court held that UBS could file a supplemental submission to cure this deficiency.
This case stands as a reminder that parties seeking to confirm FINRA Arbitration awards should always ensure their petitions are supported by the underlying arbitration agreements and arbitration award.
Troutman Pepper frequently represents financial services institutions such as broker-dealers and their associated persons in FINRA arbitration disputes and regulatory matters involving customer/investor, employment, and intra-industry claims.