Tales From the Front:
Reasons to Retain Independent Counsel To Protect Your Interests

(Submitted to On Wall Street for Publication in April)

wo former Salomon Smith Barney reps recently filed a claim against their former brokerage firm for not adequately protecting their interests in responding to customer arbitration claims. Unfortunately, reps commonly complain of inadequate protection. In securities arbitrations (or disciplinary matters), reps who consent to being represented by the same attorney representing their employer receive free, but frequently inadequate, representation.

Consider the plight of the two former Salomon Smith Barney reps. With a $2 billion book built largely on Worldcom employee stock option exercises, and well-known stock analyst Jack Grubman, what could be better? The beginning of the end of their happy story occurred when they began to fear that the price of WorldCom would not continue to rocket higher. However, when they attempted to convince their customers to diversify out of WorldCom, they contend that their customers refused largely because they had been, and insisted they would continue, relying upon the tremendously bullish outlook of Grubman. Grubman has maintained his buy recommendation over the last three years as the stock fell 90% from its peak. The reps' difficulties continued when more than 25 customer complaints were filed against the reps and the brokerage firm, alleging more than $35 million in losses.

To add insult to injury, the reps recently told the press that Salomon Smith Barney abandoned them as it settled some of the arbitration claims. The reps wanted to defend themselves, and they expected their firm to assist them in that effort. Instead, as those claims settle, the reps' U-4s will be adversely affected.

The lesson here is that, more often than not, the interests of reps and their firms are misaligned. Undoubtedly, the reps never should have accepted the free defense offered by their firm in the first place. Now they have separate counsel who has filed claims against the firm as well as the analyst, Jack Grubman. Unfortunately, for the claims already settled, that is too little, too late.

To amplify, independent counsel can provide valuable counsel either officially, as counsel for the rep, or unofficially in privately consulting and evaluating the efforts of the firm's lawyer on the rep's behalf. For example, recently we represented a rep who had to navigate though rough waters to safety in responding to a customer complaint. About one month before the arbitration hearing, we received a call requesting that we consider participating in mediation as an effort to resolve (i.e., pay some money to settle) the arbitration claim without the need for an arbitration hearing.

Like any competent independent counsel, we developed a strategy with the interest of our client exclusively in mind. His interest was to pay nothing, and to ensure that the CRD did not have a reference to his paying money to settle the claim. By comparison, the firm's (contrary) interest was to end the dispute, to pay a reasonable sum to settle the claim, to have the rep agree to pay as much as the firm could convince the rep to pay, and to report the settlement to the CRD with no particular regard for the rep's CRD record.

A key decision was whether to participate in mediation. We knew that, statistically, mediation has an 80% settlement success rate. But we also knew that the mediator would pressure the rep to pay money to settle. Further we knew that the customers' lawyers worked on a contingency fee basis and had a history of settling claims instead of fighting in arbitration. The claim, for about $100,000, would not provide a sufficient financial incentive for the customers' counsel to settle in mediation against the firm and then, in addition, travel from the South to Chicago to arbitrate against the broker for the prospect of recovering additional money.

Weighing all of those factors, we declined to mediate. In the end, the strategy paid off marvelously. The customers settled for about one-half of their claim. The customers' lawyers declined to arbitrate in Chicago against our client and they dismissed the claim against him. This outcome would not even have been on the radar of possible scenarios had the rep chosen the free counsel offered by the firm.

Short of retaining independent counsel for arbitration, reps can hire independent counsel to examine and evaluate the defense provided by the brokerage firm's attorney. These efforts include ensuring that all available defenses and arguments are asserted on the rep's behalf. For example, it would have been a "no-brainer" for the Salomon Smith Barney reps to have argued that it was Jack Grubman, not they, who were at fault for the customers' losses. But I doubt that that defense appears in the brokers' answer as drafted for them and for the brokerage firm by the brokerage firm's lawyer.

Additionally, as the claim moves into discovery of documents and information, it is helpful to retain independent counsel to examine what counsel for the firm is requesting from the customer (as well as what the firm's lawyer is agreeing to produce to the customer). Often (and increasingly) counsel for the firms are insurance defense counsel, quite adept at general litigation but with no securities industry or regulatory background. As they don't know the securities business, they have a limited knowledge of what to request and how to adequately respond to the customer's requests.

In addition to determining whether to mediate, as discussed above, reps can retain independent counsel to determine whether it would be in the best interest of the rep to accept - or make - a settlement offer to resolve the claim. Further, independent counsel can examine the documents that the brokerage firm's lawyer intends to use at the arbitration hearing, as well as the list of witnesses whom he or she intends to call to testify. There may be shortcomings; independent counsel can identify those, before it is too late.

The bottom line is this: reps who care about their reputations, their wallets and staying in the industry are well advised to pay for their own legal counsel. That is because, like much in life, when it comes to attorney representation, reps get what they pay for.