The Deutsche Bank Arbitration Award: The Costs of Ignoring Internal “Coverage” Fights

Financial service firms may want to pay more careful attention to internal politics and turf battles involving issues like which adviser or rep gets credit or compensation for a particular client relationship or allegations of “book poaching” and other territorial “coverage” disputes.

The FINRA arbitration in Stephen Colavito, Claimantvs. Deutsche Bank Securities, Inc.,Respondent (FINRA Arbitration 10-01557, December 27, 2011)  looks like a good example of the financial costs when management fails to deal with simmering internal battles about who gets paid for a particular client relationship or territory.  A FINRA panel awarded $3.6 million to, the claimant, a former Deutsche Bank unit managing director.  What sticks out is that the award included a punitive damage award of nearly $1.7 million to a managing director, in the firm’s Atlanta office, for an employment dispute involving internal coverage.  The punitive damage award in the case is certainly not common in FINRA arbitrations.  Generally, punitive damages may be considered in these kind of cases when statutes, rules, or arbitration provisions in contracts, permit doing so for egregious behavior.  Historically, FINRA arbitration panels have not often granted such awards without clear and convincing evidence of oppressive conduct or wrongful acts done maliciously, wantonly or with indifference to some obligation.

The arbitrators found that another Deutsche Bank managing director’s conduct was “reprehensible” when he “systematically blocked”  the claimant from conducting business with institutional clients (both broker/dealer and non-broker/dealer) without regard to whether some clients were “covered” by the claimant/managing director’s division.

 

Author: Dexter Johnson

The author is a an attorney who for the past 14 years has concentrated his practice in representing, successfully, investment advisers, broker-dealers, corporations and individuals who are subject to SEC, FINRA, State or other regulations and who may be the subject of regulatory examination, review or investigation. He formerly worked at the SEC. His regulatory and litigation experience has encompassed virtually every type of securities issue in the industry. He has also negotiated favorable outcomes in many of these matters for his clients.