Securities Industry Commentator by Bill Singer Esq

April 11, 2019

Arbitrators Award Jefferies $1 Million Liquidated Damages Against Investment Banker. In the Matter of the Arbitration Between Jefferies, LLC, Claimant/Counter-Respondent, v. Jon Alan Gegenheimer, Respondent/Counter-Claimant (FINRA Arbitration Decision 16-02461)
So . . . we got a 17-page FINRA Arbitration Decision and, you know, there's good reason for this one to be as long as it is because, omigod, what a fact pattern and what a procedural nightmare! The Statement of Claim was filed in 2016 by FINRA member firm Jefferies against associated person Gegenheimer. If you are truly a serious industry professional, then you need to put in the time to read this Decision in depth. Accordingly, I'm going to summarize as quickly as possible by resorting to -- duh -- the "Case Summary" portion of the Decision:

Jefferies asserted a claim to recover $1,000,000.00 in liquidated damages that it alleged Gegenheimer owed as a result of breaching the parties' agreement that Gegenheimer executed on May 18, 2016 (the "Agreement"). Jefferies alleged that Gegenheimer was to commence employment at the firm on or before August 17, 2016, and, if he failed to do so, he would be liable to Jefferies for liquidated damages in the amount of $1,000,000.00 pursuant to the Agreement. 

Unless specifically admitted in the Statement of Answer and Counterclaims, Gegenheimer denied the allegations made in the Statement of Claim and asserted various affirmative defenses. In his Counterclaims, Gegenheimer asserted the following causes of action: violation of FINRA Rule 2010; unfair competition; tortious interference with contract and economic relations; and abuse of process. 

In the Amended Statement of Answer and Counterclaims, Gegenheimer added equitable estoppel as a defense. 

Unless specifically admitted in the Statements of Answer to the Counterclaims and the Amended Statement of Answer and Counterclaims, Jefferies denied the allegations made in the Counterclaims and the Amended Statement of Answer and Counterclaims and asserted various affirmative defenses.  

Movin' along here, in 2017, the parties agreed to bifurcated proceedings and, accordingly, the FINRA Arbitration Panel initially adjudicated only whether the liquidated damages provision of the Agreement is enforceable or unenforceable. In part, this is how the Panel framed the Part One Hearing's underlying issues:

Claimant Jefferies LLC ("Jefferies") is a financial services firm with its headquarters and principal place of business in New York, New York. Respondent Jon A. Gegenheimer ("Gegenheimer") is an investment banker employed by Credit Suisse since 2003 in San Francisco, California. On May 18, 2016, Jefferies and Gegenheimer entered into a written agreement ("the Agreement") under the terms of which Gegenheimer agreed to join Jefferies as a managing director specializing in mergers and acquisitions in Jefferies' technology group in San Francisco. The Agreement provided that Gegenheimer would receive an annual salary of $350,000, a fiscal year 2016 retention bonus of $720,834, and up to $300,000 to replace deferred compensation from Credit Suisse that Gegenheimer would forfeit by leaving Credit Suisse and joining Jefferies. 

The Agreement further provided that Gegenheimer's employment with Jefferies would not commence until August 17, 2016, because Gegenheimer was required to provide Credit Suisse with ninety (90) days prior written notice of his intention to resign. The Agreement obligated Gegenheimer to pay Jefferies liquidated damages if he failed to commence employment with Jefferies. The liquidated damages clause, Section V.B. of the Agreement, provides as follows: 

If during the period beginning from the date you execute this Agreement until your Start Date ("the Interim Period"), you fail to commence employment by August 17, 2016, you agree to pay Jefferies $1,000,000 as liquidated damages ("Liquidated Damages"), which represent only an approximation of a portion of the anticipated loss created by such a violation. For the avoidance of doubt, this Liquidated Damages provision is applicable only if you voluntarily fail to commence employment with Jefferies (except as a result of Jefferies' written withdrawal of this offer): (a) because you return as an employee of Credit Suisse or (b) to engage in Competitive Activity (as defined in the Jefferies Employee Handbook). You agree the Liquidated Damages are reasonable and do not operate as a penalty but reflect Jefferies' reasonable approximation of a portion of its anticipated loss as a result of Jefferies' reliance on your commitment to render services pursuant to this Agreement by your Start Date, Jefferies' forbearance in holding the position of Managing Director in its Investment Banking Division open for you and not hiring another individual for this position during the Interim Period, and all costs incurred by Jefferies to fill the Investment Banking Division Managing Director Position. Nothing in this section shall prevent Jefferies from recovering its actual damages exceeding the Liquidated Damages, and Jefferies shall have the right to avail itself of all other available remedies.  

Jefferies determined the liquidated damages amount by taking Gegenheimer's agreed first year compensation at Jefferies and rounding down to $1,000,000. 

On May 24, 2016, Gegenheimer informed Jefferies that he would not join Jefferies as agreed, but instead would remain with Credit Suisse. On or about August 10, 2016, Credit Suisse offered Gegenheimer a retention award of $1,150,000 in guaranteed total compensation for 2016; Gegenheimer accepted the offer and signed a Retention Agreement.  

The FINRA Arbitration Panel found that the liquidated damages clause was enforceable by Jefferies against Gegenheimer. In reaching its findings, the Panel acknowedged, in part, that:

[G]egenheimer also contends that the liquidated damages clause is not enforceable as to him, a resident and employee in the State of California, because the clause violates the strong fundamental public policy of the State of California codified in California Business & Professions Code Section 16600 ("Section 16600"), which provides that "[e]xcept as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." 

Section 16600 has been applied in many cases to nullify post-employment non-competition agreements and restrictive covenants that would keep California residents from engaging in lawful employment. However, Section V.B. of the Agreement is not a post-employment restrictive covenant. Section 16600 does not apply to an agreement to begin working by a particular date as provided in the Agreement. The Agreement did not require Gegenheimer to cease working for Credit Suisse or refrain from working for any other competitor before joining Jefferies. The liquidated damages clause in the Agreement did not restrain Gegenheimer from engaging in his profession in violation of Section 16600. 

An interesting bit of analysis by the FINRA arbitrators. They did not see Section 16600 applying to an agreement "to begin working," in contradistinction to a more pure "employment" agreement.  The arbitrators place great emphasis on the lack of "non-competition" prohibitions that could have constrained Gegenheimer from working at Credit Suisse or elsewhere. Not sure that I buy the rationale but I will concede that the arbitrators made an effort and have presented some compelling considerations. Not unsurprisingly, Gegehneimer did not accept the FINRA Arbitration Panel's findings: 
By letter dated February 8, 2018, Gegenheimer advised that he filed a motion in United States District Court for the Northern District of California ("District Court") seeking an order vacating the Panel's Liquidated Damages Order, and requested that the Panel suspend any further proceedings in this matter pending the District Court's decision regarding the enforceability of the liquidated damages provision. By letter dated February 12, Jefferies filed an opposition to Gegenheimer's request to stay the matter. By letter dated February 15, Gegenheimer filed an opposition to Jefferies letter and renewed his request to stay all further proceedings in the matter. By Order dated February 20, 2018, the Panel held that:  
  • The Liquidated Damages Order concluded the first portion of the bifurcated proceeding pursuant to the parties' stipulation;
  • The arbitration must continue to resolve the remaining issues;
  • The Panel's Liquidated Damages Order was not intended to be a Final Award or Interim Final Award subject to confirmation or vacatur by court; 
  • Jefferies' request to schedule additional hearing dates is granted; and 
  • Gegenheimer's request to stay the proceedings is denied.  
Faced with the conclusion of the Part One Hearing and in anticipation of the Part Two Hearing, Gegenheimer engaged in a flurry of motion practice, among which: 

On December 12, 2018, Gegenheimer filed a Motion to Reconsider the Panel's January 29, 2018 Liquidated Damages Order and Motion for Clarification of the Panel's May 21, 2018 Scheduling Order ("Motions to Reconsider and for Clarification"), including a copy of the District Court's March 29, 2018 Order Granting Motion to Dismiss Petition to Vacate Arbitration Award ("District Court Order").1 On December 24, Jefferies filed an opposition to Gegenheimer's Motions to Reconsider and for Clarification. On December 31, Gegenheimer filed a reply in support of his Motions to Reconsider and for Clarification. By Order dated January 9, 2019, the Panel denied Gegenheimer's Motions to Reconsider and for Clarification, and advised that the Panel has inherent authority to reconsider and modify interim orders in this arbitration, including the Liquidated Damages Order, at any time before entering the final award. 
Footnote 1: The District Court Order stated that, "[a]lthough the decision of the panel regarding the liquidated damages provision is very likely wrong (perhaps to the point that the panel should be understood to have manifestly disregarded the law), the panel's decision is not yet subject to review by a federal district court. In the Ninth Circuit an arbitrator's ruling following the first phase of a bifurcated proceeding is not "final and reviewable." Millmen Local 550 v. Wells Exterior Trim, 828 F.2d 1373, 1375 (9th Cir. 1987)." 

That Footnote 1 is a killer. Not sure that the Panel or Jefferies should take too much comfort from the observation that the Panel's liquidated-damages-non-competition decision is "very likely wrong." Notwithstanding, the FINRA Hearing Panel stayed its course and moved forward with the Part Two Hearing. At this juncture, we are offered some further background as to the underlying dispute:

In January 2016, Gegenheimer was dissatisfied with his compensation, job title, and scope of his responsibilities at Credit Suisse, where he was employed. On May 18, after weeks of confidential discussions with a recruiter and a former Credit Suisse employee who was at Jefferies ("Mr. G"), another employee of Jefferies ("Mr. K") called Gegenheimer and told him that Jefferies was prepared to pay Gegenheimer $1,070,834.00 in first year salary and bonus and make him a Managing Director. The offer was an improvement on Mr. G's discussion days earlier, of between $700,000.00 and $750,000.00 in compensation and without the title of Managing Director, which was rejected by Gegenheimer. The May 18 offer represented a significant increase in compensation, enhanced title and improved prospects for Gegenheimer, who responded, "that sounds fine." Soon thereafter on the same day, Gegenheimer entered The Cone. 

On May 18, 2016, Gegenheimer arrived at Jefferies' San Francisco office at about 3:00 p.m., met with a Jefferies administrative assistant, and was shown into a conference room where he was given the Jefferies offer letter for the first time ("Offer Letter"). Except for the Jefferies administrative assistant, Gegenheimer was alone in the conference room. Gegenheimer spoke by telephone with Mr. K who agreed to a hand-written change in the Offer Letter to correct a miscalculation regarding reimbursement of the amount of "leave behinds." Gegenheimer asked Mr. K to send a copy of the Offer Letter to Gegenheimer's attorney, Mr. T, who had extensively negotiated and advised other Credit Suisse investment bankers regarding their contracts with Jefferies days earlier. Other than the compensation, title and term, the Offer Letter was identical to the final agreement Mr. T negotiated for the other Credit Suisse investment bankers. After Mr. T received the Offer Letter, Gegenheimer conferred by telephone for 20 to 30 minutes with Mr. T. Gegenheimer also conferred by telephone for 20 to 30 minutes with his girlfriend, an attorney at Skadden, Arps, Slate, Meagher & Flom LLP ("Skadden"), who expressed objection to some provisions of the Offer Letter, including the liquidated damages provision. Gegenheimer spent more than an hour in the conference room before signing the Offer Letter. Gegenheimer was aware of the liquidated damages provision in the Offer Letter when he signed it on May 18, 2016. Hereinafter, the signed Offer Letter is referred to as the Agreement. 

After signing the Agreement, Gegenheimer sent his resignation to Credit Suisse, thereby starting his 90-day garden leave. On the evening of May 18, 2016, Gegenheimer contacted an employee at Credit Suisse ("Mr. W") to advise him of his decision to leave Credit Suisse. Mr. W told Gegenheimer he would like Gegenheimer to stay at Credit Suisse. On May 19, Mr. W conveyed a proposal under which Credit Suisse would pay Gegenheimer $1,150,000.00 and promote him to Managing Director in the next review cycle. Mr. W also explained that Credit Suisse would indemnify Gegenheimer, pursuant to the Credit Suisse indemnification policy, if the liquidated damages provision in the Agreement was enforceable. After further discussions, Gegenheimer reached a satisfactory agreement with Credit Suisse for him to stay at Credit Suisse. On May 24, Gegenheimer advised Jefferies by email that he was "rescinding" his acceptance of the Offer Letter and would not be joining Jefferies. At that time, Gegenheimer was confident that he was covered by Credit Suisse's indemnification policy. 

After receiving Gegenheimer's May 24, 2016 email, Jefferies asked him to fly to New York City to meet with three of Jefferies' senior executives, including Messrs. F and H. Gegenheimer traveled to New York City for meetings on June 8, 2016. In the meeting with Mr. H, Gegenheimer was told, in essence, if he did not come to Jefferies, "We're not going to f*** you up" and "once this is over, we're all going to go our separate ways. We're all going to move on. Everyone's going to be fine." In the meeting with Mr. F, Gegenheimer was advised to "take a long walk on the beach and make the decision that you think is right for yourself and your family." In the meetings, there was no explicit reference to the liquidated damages provision of the Agreement signed by Gegenheimer on May 18, 2016. 

Gegenheimer remained at Credit Suisse. On or about August 10, 2016, he signed a retainer agreement with Credit Suisse. Gegenheimer did not commence employment at Jefferies on August 17, 2016, as he had agreed to in the Agreement he signed on May 18, 2016.

Ultimately, the FINRA Arbitration Panel found Respondent Gegenheimer liable to and ordered him to pay to Claimant Jefferies $1 million in liquidated damages and $483,245.36 in costs and fees. Just goin' out on a limb here but I'm guessing that Gegenheimer will move to vacate. I'm not sure how the Panel's Award will survive a challenge under California law but it may be that said law is deemed to not apply to the dispute, or, in the alternative, if it does apply, that the facts at issue do not invoke a disfavored non-compete. To be clear, I am NOT saying that the Agreement does or does not contain a non-competition provision, but it sure as hell quacks like a duck -- the bigger question is whether it also walks like one. Which makes me consider and reconsider the advice given to Gegenheimer to "take a long walk on the beach" before signing off on the now-disputed Agreement. The truly troubling aspect of this dispute is that Gegenheimer is sort of arguing for a "heads I win, tails you lose" proposition. Frankly, this is all setting up to be one helluva fascinating appeal!

Husband Of Former Employee Of New Jersey Bank Sentenced To 27 Months In Prison For Stealing Client Information And Funds (DOJ Release)
In an Indictment filed in the United States District Court for the Southern District of New York, Seconey Brown and his wife Antoinette Mitchell-Brown were charged with having engaged in a scheme to fraudulently obtain funds from more than 25 accounts at Bank-1, at which Mitchell-Brown was then employed.  Allegedly, Mitchell-Brown stole victims' bank account information from her employer and used that information to, among other things, write checks and initiate wire transfers from victims' accounts to bank accounts controlled by members of the scheme.  Brown allegedly paid members of the scheme or otherwise induced other individuals (some of whom provided unwitting assistance) to cash or deposit the fraudulent checks from his wife, and to provide the proceeds to him, or, at his direction, other individuals.  In total, the defendants' scheme fraudulently obtained almost $100,000 and attempted to obtain at least an additional $660,000. The couple pled guilty to participating in a conspiracy to commit bank fraud. Brown was sentenced to 2 years of supervised release, and was ordered to pay $93,123.14 in restitution; Mitchell-Brown was sentenced to 366 days in prison and two years of supervised release, and was ordered to pay $93,123.14 in restitution.
Postage stamps are tokens. You buy them for cash and you use them to pay for mail services instead of taping coins or dollar bills to your envelope. A token, by anyone's definition, is not a security, but it took an SEC no-action letter to assure us. Turnkey Jet (TKJ) leases private business jets. It decided to set up a private blockchain and issue tokens to its members in order maximize the efficiency of its operations. TKJ's members include end-users, jet brokers, and other air transport companies. Each TKJ token is worth a dollar, and TKJ says it will always be worth a dollar, even if the cost of air travel increases. Once purchased, they are refundable only at a discount. Members can use the tokens only to pay for air charter services, not to invest in TKJ. The tokens can be transferred, but only to other TKJ members. TKJ will market the tokens only as a way to pay for air services, and not as an investment opportunity.

SEC Charges New Jersey Investment Adviser with Securities Fraud (SEC Release)
In a Complaint filed in the United States District Court for the Eastern District of New York,, the SEC alleges that Gonzalo Ortiz Ortiz violated the antifraud provisions of the securities laws: Section 17(a) of the Securities Act; Section 10(b) of the Securities Exchange Act  and Rule 10b-5 thereunder; and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The SEC seeks permanent injunctions and financial penalties against Ortiz, and return of allegedly ill-gotten gains with prejudgment interest. As set forth in part in the SEC Release:

[G]onzalo Ortiz, of Hackensack, New Jersey, falsely touted his success in investing in stocks and promised the investor a minimum 50% return in a year, and induced the investor to give him control of over $570,000 the investor's retirement savings. The complaint alleges that contrary to these promises, Ortiz misappropriated almost half of the funds and invested the other funds in high-risk microcap companies that generated significant losses. Ortiz then concealed the misappropriation and losses by providing the investor with a phony account statement that falsely showed high returns. According to the complaint, Ortiz misappropriated approximately $224,500 of the investor's money, and lost approximately $290,000 through his trading.

Expungement Granted By Arbitrator Who Found Customers Caused Their Own Losses. In the Matter of the Arbitration Between Eric A. Dupre, Claimant, v. Raymond, James & Associates, Inc. and UBS Financial Services Inc., Respondents (FINRA Arbitration Decision 18-02819)
In recommending an expungement of a customer complaint, a FINRA Arbitrator offered a very concise rationale:

The Claimant "inherited" both of the customers from a colleague who had been their advisor. As to both claims, the evidence demonstrated that the customers' alleged losses were not caused by the Claimant, but by their own decisions to ignore sound advice given and explained to them by Claimant. In fact, one customer insisted that the Claimant place stock trades on his behalf against Claimant's recommendation and the other customer independently directed Claimant to purchase additional energy sector stock despite Claimant's advice that he diversity his portfolio.

FINRA Bars Rep In Non-Payment of Customer Loan. In the Matter of Michael Paul Lessard, Jr, Respondent (FINRA AWC 2018058520801).
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Michael Paul Lessard, Jr submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA found that Lessard had violated FINRA Rules 3240 and 2010, and imposed a Bar from association with any FINRA member firm in all capacities. As set forth in part in the FINRA AWC:

In December 2016, while associated with Southeast, Lessard borrowed $60,000 from his Southeast customer G.J., a senior investor to whom Lessard is unrelated, The loan by G.J. to Lessard was undocumented. Later in December 2016 and in January 2017, Lessard repaid G.J. a portion of the loan. Lessard failed to pay G.J. the balance of the loan and only did so after G.J. and her accountant confronted him in April 2018 about the unpaid balance. Lessard failed to notify Southeast of his borrowing arrangement with G.J. nor seek the firm's approval. 

On or about April 30, 2018, while associated with Dempsey Lord, Lessard borrowed $22,750 from Dempsey Lord customer C.B., to whom Lessard was not related. Lessard borrowed the money through Palmetto Premier Advisors, LLC, an entity that he owned and controlled. Lessard signed a promissory note for the loan that required monthly payments of $2,000 from June 1, 2018 until July 1, 2019, with a total payment of principal and interest of 524,001. Subsequently, Lessard closed Palmetto Premier Advisors, LLC, and failed to repay the loan. Lessard failed to notify Dempsey Lord of his borrowing arrangement with C.B. nor did he seek the firm's approval.