A wirehouse promises a veteran advisor a $150 million book of business and a $450,000-plus upfront bonus to come on over. The wirehouse resigns the FA's job for him at his current firm, then e-mails his clients to tell them he's leaving.
This strange and unusual real-life scenario begins to boarder on the bizarre when the book of business turns out to be only $10 million and five months after the advisor joins the firm, the wirehouse takes the vexed FA to arbitration by the Financial Industry Regulatory Authority (FINRA).
That is allegedly what happened to Alfonso R. Montoya, 59, based in Aventura, Florida, when in 2012, Wells Fargo Advisors recruited him from HSBC Securities. Act III of this odd case is now playing out in district court.
The biggest surprise is that in arbitration, Montoya prevailed in his fraudulent-inducement counterclaim to Wells Fargo's demand of payment on his signing-bonus promissory note.
"The most interesting fact here is that a FINRA panel found against one of the bigger banks. It's typically biased in favor of the wirehouses and big advisory firms," says Los Angeles-based securities attorney Shirley Hayton, partner in Gartenberg Gelfand Hayton. She tried and won a 2013 arbitration in which Edward Jones sued advisor John Lindsey for $5 million. FINRA dismissed the case.
Montoya began at Citibank in 1996. From September 1998 to May 2005, he was with Citicorp Investment Services, then with Wachovia until September 2005. The following month, he moved to HSBC.
When Wells recruited him, he was an HSBC bank officer selling bank-related products and a registered representative with HSBC Securities. He had a $150 million book and 600 clients, according to documents filed in the federal court system.
He left all those assets at HSBC because Wells Fargo's Michael Petramalo, senior vice president and regional manager, allegedly promised him a book of comparable size if he'd join the firm.
Instead of enjoying a great career move, Montoya found himself in FINRA arbitration in Boca Raton, Florida, for breach of contract. In July of this year, he was ordered to pay Wells $450,138.
But in a twist, the panel found Wells Fargo and Petramalo liable for fraudulent inducement and negligent misrepresentation. It awarded Montoya $200,000 in damages but used it to offset the $450,138 he owed Wells, for a net debt of $250,138.
"This case is a disaster — he got an offset of $200,000; but he still owes on the $450,000," says Erwin Shustak, a securities attorney who runs his namesake firm's litigation and arbitration department in San Diego.
Attorney Chris Vernon, of Vernon Healy, in Naples, Florida, who represented advisor James C. Eastman in an arbitration and last year got Morgan Stanley brokerage dismissed from the case, summarizes his takeaway on the Montoya matter as: "The arbitrators undercompensated the advisor for his counter-complaint."
"I've never heard of a firm saying, 'We're going to give you a $150 million book.' It's weird," Vernon says. "What troubles me is that if they found liability, they should have awarded him about $2 million based on a $150 million book. The problem is that when there's a legitimate counterclaim, [FINRA] wants to use it to reduce the amount of the note and so, tends to undervalue it."
Wells Fargo Advisors, HSBC and Montoya's attorney declined to comment for this article. Wells Fargo attorneys did not respond to emails and phone calls. HSBC says it has not approved Montoya to speak to the media.
Why should HSBC control whether or not Montoya talks to the press? Because only a few months after his resignation, the FA returned to HSBC as a vice president and senior advisor. And there he works today. Why did HSBC take him back?
"It's probably about HSBC preserving those accounts and not wanting to see more of them, if any, go over to Wells. That's the bottom line," says Patrick Burns, managing attorney of The Law Offices of Patrick J. Burns and president of Advanced Regulatory Compliance, an investment advisory consulting firm, in Beverly Hills, California.
Opines Shustak: "Montoya probably had a good relationship with HSBC and didn't leave on bad terms. He was induced to leave based on false promises by Wells Fargo, so they didn't hold it against him that he left for a better opportunity."
According to Montoya's U4, the advisor had seven customer disputes between 2001 and 2013. One was settled, the rest, chiefly involving annuities, denied.
The four securities attorneys interviewed for this story – none involved in the Montoya case – call Wells Fargo's alleged recruiting promise of a $150 million book highly unusual. They also say it's peculiar that Montoya would leave $150 million in AUM at the firm he was exiting.
But Shustak suggests that "he didn't take the clients with him because his book wasn't portable — they were bank clients, and you can't take bank clients with you. He was servicing a $150 million asset base because he was a dual-purpose person. He was really working for the bank but was registered to sell securities," he says. "We had a case against Wells Fargo for the same thing."
Burns labels Petramalo's handing in Montoya's resignation "extremely unorthodox."
"I've never heard of any case where somebody's new manager calls up and resigns the person that just joined," he said.
