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.
It was only after Petramalo allegedly told HSBC of Montoya’s recruitment that the FA purportedly had the opportunity to review the promissory note.
This meant, Vernon says, that Montoya had no option but to sign the note and hop aboard Wells Fargo.
“He realized that he had no choice. They took away his choices. They already cut ties for him with HSBC. He had to sign the note so that he could continue in the business,” Vernon says.
Montoya was under a one-year noncompete clause. So when Petramalo’s assistant allegedly sent e-mails to his former clients telling them that their advisor had left, HSBC prohibited the FA from working at Wells for almost five weeks.
Once reporting to his new firm, Montoya discovered that his promised book was not $150 million in assets but only $10 million.
Burns speculates that if Montoya hadn’t taken those five weeks away, he may have received a much larger book.
“While he was off on the sidelines,” Burns says, “maybe other reps said, ‘Well, if he’s not in the game, let us have the accounts.’”
It’s also possible that Wells promised the same $150 million book to a couple of other potential hires, Shustak proposes.
“Wells Fargo probably said, ‘We’ll replace your [HSBC] $150 million client base with another $150 million book. Either they didn’t have that client base to give Montoya or they promised it to two other people at the same time, which has happened with Wells Fargo cases. They sold the piano three times, and that’s why Montoya’s book was smaller.”
After only five months at Wells and allegedly numerous unheeded requests for Petramalo to assign him the $150 million book, Montoya was “forced” to resign, court documents show.
“’Forced’ could mean anything,” notes Hayton. “It could mean ‘forced’ because he didn’t deliver what they thought he would, or because he didn’t get what he was promised and wasn’t making a living based on the book he actually got.” In any event, at that point Montoya’s promissory note was due and payable. When he failed to pay it, Wells brought him to FINRA arbitration for breach of contract. The advisor’s counterclaim sought to invalidate the promissory note, charging that Wells fraudulently induced him to sign it and then failed to honor its contractual commitments.
Montoya also filed a third-party claim against Petramalo for fraudulent inducement in offering him the job.
Burns and Hayton figure that, in order to convince the FINRA panel to find Wells and Petramalo liable for fraudulent inducement and negligent misrepresentation, there must have been compelling, tangible documentary evidence — something in writing — in addition to the fact that Wells provided Montoya with only a $10 million book.
Now Wells is suing the advisor in district court to recover attorneys’ fees in connection with the note proceedings.
Explains Hayton: “Wells Fargo is petitioning the court to vacate [nullify] the part of the [FINRA] award that states that no attorneys’ fees were granted on the grounds that the issue was not before the [arbitration] panel.”
It is unlikely that the wirehouse will have much success, Burns insists. “Once these arbitration cases are decided, that’s pretty much it.”
So when and where did Montoya fumble the ball big-time in handling his transition?
“First of all,” Shustak says, “whether they put [promises] in writing or not, I don’t know if I would trust the firm[s]. And if they won’t put it in writing, you have to assume they’re not going to honor their verbal commitments. Obviously, there was some negligence and fraudulent inducement that went on but not enough to overcome everything else.”
In being recruited, advisors might do well to maintain a skeptical mindset. This advisor, apparently, did not.
“A lot of things are believed by people when they’re getting recruited, especially if there’s a recruitment check upfront,” Burns says. “People believe what they want to believe. A lot of folks handing out these checks are very believable folks.”
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