RIA loses $10 million case against Raymond James the old-fashioned way

A Chicago Circuit County judge has dismissed an advisor’s lawsuit against Raymond James Financial Inc. but commented in the ruling that the company used an “unusual manner” in getting the advisor to commit to arbitration in a compliance-required ethics exam administered on a computer.

Robert B. Rowe Jr. sued Raymond James Financial Inc. in Cook County, Ill. in March, alleging that he was misled into leaving Morgan Stanley and joining Raymond James. Rowe wants to rescind the loan and retention bonus agreements, saying the documents were entered into deceitfully and fraudulently. See: Advisor sues Raymond James after he joins one RIA and forms another.

In July, Judge Mary Mikva ruled in favor of Raymond James, stating that the case must be arbitrated by the Financial Industry Regulatory Authority. But she also stated that Rowe could return to court if he had additional claims to address. Rowe was seeking damages “in excess of $10 million as well as punitive damages, attorney’s fees and other costs,” according to court filings.

Take it or leave it

Rowe was presented with the arbitration agreements in a “take-it-or-leave-it manner that in and of itself does not necessarily render the agreements unconscionable,” Mikva writes in her ruling.

“While the court agrees with Rowe that Raymond James’ arbitration agreements were sprung upon Rowe in an unusual manner – as part of an electronic ethics exam – the form U-4 arbitration provision is binding and thus Rowe must arbitrate his claims against defendants before FINRA.”

A spokesperson with Raymond James declined comment on the case.

Robert B. Rowe got some sympathy
from Judge Mary Mikva but no
favorable verdict.

Rowe’s attorney, Mark Belongia, with Shapiro & Franklin in Chicago, who has represented other advisors, says he was surprised the judge commented directly on the manner in which the arbitration agreements were presented.

When Rowe was at Raymond James, Belongia says he completed his annual compliance exam on a computer. But as part of that test, he had to agree to arbitration in order to finish the exam.

“The arbitration agreement was stuck in at the end of his ethics exam and it should have been separate and distinct,” Belongia says. “It was put in the exam so he had no other choice but to say yes, otherwise he wouldn’t be licensed and that would be a problem.”

'Pop’ quiz

Advisors should brace themselves for more of these types of “pop-up-reminders,” says attorney Brian Hamburger, founder of Hamburger Law Firm and MarketCounsel. He says broker-dealers are starting to give advisors yearly electronic reminders and that it’s not uncommon for these pop-ups to occur when advisors are taking annual industry exams.

“I call it the belt-and-suspenders approach,” Hamburger says. “The advisor already has the contractual obligation and every year, they have to sign a pop-up-screen saying they agree to their obligation. The broker-dealer now has documents [showing] that the advisors have agreed to their obligation each year.”

The pop-up screen may not address each advisor’s specific issues but reminds them of general provisions such as issues about outside business activities and general obligations the advisor has to the firm.

“These are becoming more prevalent as firms rely more and more on electronic platforms,” Hamburger says.

Promises, promises

Rowe’s original lawsuit included dozens of e-mails sent to and from Raymond James officials over a number of years. He also included sample contracts and sample documents given to him by Raymond James officials that he alleges were fraudulently changed later.

Rowe received a signing bonus of $488,799.60 that he alleged was “significantly less” than what he was promised. Rowe claims that he didn’t get paid for more than a year even though he earned in excess of $550,000. Eventually, Rowe says, he signed a new deal in 2007 under “duress” since he hadn’t been compensated for more than a year.

Earlier this year, Rowe told RIABiz that in 2005 he chose to take his team of eight, along with its annual profits of $2 million, to Raymond James because the firm offered him a number of opportunities to grow his business.

According to Rowe, Raymond James officials said he could continue to pursue other ventures and that he would be free to set up his own RIA. Rowe alleges that Raymond James reneged on both promises.

Read the fine print

It’s a situation advisors face all too often, says Hamburger. He warns advisors to make sure that all agreements are memorialized in the initial contract.

Adding to the problem is that many advisors tend to be optimistic by nature, Hamburger says. “Advisors are looking forward to a bright future and they don’t envision being in a situation like this.”

Rowe left Raymond James in January to join AZA Capital Management of Troy, Mich. He’s working to set up his own Chicago-based RIA, Enhanced Investment Partners LLC.

“[Rowe] faces an uphill battle if he relied on oral statements,” Hamburger says. “If he had them in the agreement it would have been easy to enforce. It’s difficult to imagine what will transpire.”