As the case of Camarda vs CFP Board winds closer towards a potential trial date, estimated legal costs for the organization continue to mount, and what started out as a dispute regarding a disciplinary action for one certificant may end out being a multi-million dollar expense for the CFP Board by the end.
Yet what’s really at stake for the CFP Board is not just the expense of pursuing a lawsuit – and potentially paying additional damages if found guilty, and more damages if others who have been disciplined by the Board’s Disciplinary and Ethics Commission (DEC) return to challenge their outcome, too – but the risk of a legal stigma against it for being found guilty in a court of law of breaching its contract with CFP certificants by failing to promulgate clear rules and enforce them consistently.
Such a stigma could haunt the organization for the foreseeable future as it attempts to establish the CFP marks as the minimum standard for a financial planning professional in the eyes of regulators, legislators and the public.
Of course, if the CFP Board had an unequivocally clear case for defending itself and its actions, it would be only natural for the organization to protect its interests by pursuing the case to its bitter end. Yet with a litany of embarrassments for the organization in trying to enforce its compensation disclosure rules over the past two years – culminating most recently in the resignation of its own Managing Director of Professional Standards (a vote of no-confidence from its own key employee?) – the CFP Board may be at more risk of losing than it is willing to publicly admit.
What Your Peers Are Reading
Unfortunately, the Camarda case has progressed so far that at this point that even settling will still be a very potentially expensive proposition for the CFP Board, and with so much in sunk costs it may seem like proceeding to trial is the inevitable conclusion. Yet with the benefits of winning so outweighed by the adverse consequences of a loss, and the CFP Board’s compensation disclosure challenges over the past year raising the concern that the CFP Board might not prevail in its defense, the question arises: should the CFP Board really be taking the risk, or will its Board of Directors intervene to protect the organization’s long-term interests?
You can view the CFP Board’s official response to this post at the end of this article.
The Stakes in the CFP Board’s Camarda Case
Having perhaps underestimated the persistence of the Camardas in their lawsuit, the stakes in the CFP Board’s case have risen dramatically over the past year, with both financial and legal ramifications for the organization.
Legal Fees and Staffing Costs
Earlier this year, Financial Planning magazine reported that as a part of its ongoing court filings in the Camarda case, the CFP Board acknowledged that it had already logged more than 2,000 hours of legal work just to comply with the Camarda discovery request. At a “conservative” $300/hour for Washington, D.C. lawyers, that would imply a cost of more than $600,000 for the discovery phase of the case. That doesn’t include the long series of legal motions that have gone back and forth as a part of the discovery process, and all the other legal work that has been underway behind the scenes since the Camardas were first notified of the adverse decision for their appeal in early 2013 and decided to file suit.
That also doesn’t include CFP Board staff compensation costs for the time that Michael Shaw (Managing Director of Professional Standards and Legal, at a Form-990-disclosed annual salary and other compensation of $326,000) and his staff have put in for this case instead of attending to other CFP Board duties over the past two years. In total, it’s seems reasonable to suggest that the CFP Board was already into the case for upwards of $1 million by the end of the discovery phase.
Of course, even these costs may pale in comparison to the total legal bills the CFP Board may face by the end of the case. The above-mentioned costs were just for the CFP Board to gather its own documents and prepare for discovery, not including the analysis of the similar reams of documents the Camardas have provided. The actual cost of a case can become dramatically more expensive once the deposition phase begins, including hiring expert witnesses (and counter witnesses) to evaluate the facts and details of the case, and the hours of lawyers involved to depose each and every witness.
With the depositions phase reportedly just wrapped up in recent weeks, now the CFP Board will begin to prepare for the next phase, the actual trial (which will include more time with lawyers and expert witnesses poring over the details of all the depositions). All in, with outright legal costs and the indirect costs of staff time (for both supporting legal work and the time to be deposed and pursue the case), it’s not hard to imagine that the CFP Board could be in for $1.5 million to $2 million or more to pursue the Camarda case to the bitter end.
Granted, this cost isn’t necessarily destructive to the CFP Board, which according to its Form 990 for 2012 has annual revenue of approximately $26 million. However, because $145 of its annual dues are explicitly earmarked for the organization’s ongoing public awareness campaign (adding up to almost $10 million across 70,000+ CFP certificants), the true “core” operating budget for the organization is probably closer to $16 million, which would put the cost of the Camarda case at close to 12% of annual operating expenses! Viewed another way, with 70,000 CFP certificants, the costs of the legal battle could be as much as about $30 per certificant by its conclusion next year.
Yet to truly consider what’s at stake financially for the CFP Board, it’s necessary to consider not just the CFP Board’s costs, but also what the CFP Board could be on the hook for if they lose. At a minimum, if the Camardas prevail, the CFP Board could potentially be assessed the Camardas’ legal costs for having pursued the case to defend themselves – which, if they’re anything like the CFP Board’s own efforts, could amount to another $1 million or more in legal fees.
Then there’s the fact that the Camardas are suing not only to block the CFP Board’s public letter of admonition and also their legal costs, but at this point are suing for business damages caused to the Camardas’ business and reputation as a result of the publicity of the case and the CFP Board’s allegations against them.
What if the court also decides that the near- and long-term damages to the Camardas’ business amounts to several million dollars more? Could the CFP Board be facing the possibility of a $5 million, $7 million or even $10 million tab if it loses and the Camardas can substantiate significant business damage?
At these levels, the issue is no longer just the potential for a small dent in the CFP Board’s annual profit-and-loss and a little spend-down from its balance sheet due to some “extra” legal costs. According to the CFP Board’s Form 990, its total reserves and long-term assets are almost $24 million, which means a significant loss for the CFP Board would put a significant dent in the reserves it has accumulated cumulatively over its decades of existence. While still not a threat to the near-term financial viability of the organization, such a loss would be felt financially for many years to come if the organization is forced to rebuild its reserve capacity.
Non-Financial Concerns in Losing the Camarda Case
Beyond the financial issues, it’s crucial to recognize the equally important non-financial stakes for the CFP Board as well. Ultimately, the case of Camardas vs CFP Board is not actually about whether the Camardas were in violation of the compensation disclosure rules or not; it’s about whether the CFP Board breached its contract with CFP certificants, failed to give due process to the Camardas by not promulgating clear and consistent rules and failed to enforce those rules fairly and consistently.
As a result, if the CFP Board loses, the door is open for virtually every other CFP certificant the CFP Board has ever brought before the DEC to question whether they, too, got a fair hearing with fair enforcement or not. Which means if the CFP Board loses, Camarda may just be the first of many (expensive) legal cases that could follow… and that in turn could lead to not only subsequent embarrassment for the organization, but a series of lawsuits for damages (from Alan Goldfarb and anyone else ever publicly admonished who could claim similar business damages to the Camardas) that could actually become an even more material threat to the CFP Board’s financial viability.
Even if/after surviving all the legal costs, though, the true consequence of a loss in the Camarda case is that it would enter into the permanent record a judgment against the CFP Board for failing to issue clear rules and standards and not providing due process in enforcing them fairly and consistently. This kind of adverse ruling will be thrown in the CFP Board’s face in every political and lobbying effort it engages in for the next decade or two. CFP Board as a potential regulator or overseer for financial planners? Not when they don’t enforce rules effectively and fail to provide due process to those who appear before the DEC, as shown in the case of Camarda vs CFP Board.
Use the CFP marks as a minimum standard for financial planners for Federal or state regulation? Not when they can’t issue clear rules and enforce them effectively, as shown in the case of Camarda vs CFP Board.
Even if the CFP Board wishes to someday forget the outcome of an adverse ruling, its political enemies will never allow the CFP Board – or the regulators and politicians they lobby – to forget. Losing Camarda vs CFP Board could impair the CFP Board’s ability to be an effective part of rulemaking for the future of the profession, which opens the door for an alternative mark or state-based license to arise instead, permanently knocking the CFP Board and its marks out of the running to become the minimum competency standard for the financial planning profession.
In addition, the risk to the CFP Board goes even beyond its potential political damage with legislators and regulators. A part of the Camarda allegations are that the CFP Board has misrepresented the CFP marks to the public by claiming that the standard is higher than what is actually being effectively enforced. The legal charge – technically claiming a violation of the Lanham Act – effectively amounts to a claim that the CFP Board has been engaging in false advertising, even as it is in the midst of its ongoing $10 million per year public awareness campaign that the CFP marks are the “gold standard” of financial planning.
That means that beyond what could be millions of dollars of damages and legal settlements if the CFP Board loses, there’s also the possibility of having flushed a significant chunk of its $30 million of public awareness advertising dollars over the past three years down the drain by being found guilty of false advertising about its standards…or “compel” it to an even more costly subsequent public awareness campaign to repair the damage of losing the Camarda case.(And CFP certificants may not be as supportive of additional fees for the next public awareness campaign!)
What if the CFP Board Wins?
To be fair, there certainly are some benefits if the CFP Board prevails in its case against the Camardas. A victory would be legal validation of the organization’s ability to set its own practice standards and the associated enforcement process. In an environment where many designations and certifications claim high standards but few do anything at all to enforce them, a victory for the CFP Board would help to put it even further ahead of competing marks as being a valid basis to be the minimum standard for the financial planning profession. Just as a loss would be a court precedent that opponents to the CFP Board could throw at it to block the adoption of the CFP marks by regulators or legislators in the future, a victory by the CFP Board would give it a positive precedent to cite in advancing the role of the CFP marks as a true professional standard.
In addition, a resounding victory by the CFP Board also introduces at least the possibility of trying to counter-sue and recover its own legal costs from the Camardas, though it’s not entirely clear if the Camardas would even have the financial wherewithal to pay such damages if they lose (on top of their own legal fees).
Realistically, it seems probable the CFP Board will pay at least its own raw legal costs (perhaps as much as $2 million all-in by the end?) even if it wins. Although given the positive publicity the organization could generate if it wins on all counts, the legal fees for the case may actually be a modest cost for the benefit.
Nonetheless, arguably the CFP Board is already on its way to advancing itself as a recognized professional standard and has been increasingly successful in this regard even without having a Camarda victory. In other words, a “win” might not even be necessary for the CFP Board to advance its agenda, but a loss would certainly damage it. That raises the significant concern that the organization has much more at stake if it loses (both financially and in pursuit of its mission) than what it stands to gain by winning.
So, Is the Board Really in Danger of Losing the Camarda Case?
Given that there are a few clear benefits of winning (that the CFP Board couldn’t achieve anyway), balanced against a potentially long list of ramifications for losing, the question arises: is the CFP Board really in danger of losing?
First and foremost, it’s important to define what a “loss” would be. The Camardas have put forth a relatively long list of legal complaints some of which carry more significant ramifications (both financially and legally) than others. However, while a victory on some of the charges might not necessarily bring the Camardas the full scope of injunctions and damages that they have requested, arguably being found guilty on any charge would be a substantive loss for the CFP Board, not just financially but especially in its efforts to elevate the CFP marks in the eyes of the public, regulators, and legislators.