Defending Against a Customer Complaint First Requires Selecting Correct Legal Counsel

Posted on October 15th, 2020 at 10:02 AM
Defending Against a Customer Complaint  First Requires Selecting Correct Legal Counsel

Customer complaints and arbitration claims never are good news for financial advisors. But too often advisors go “from the frying pan to the fire” by agreeing to be represented by the legal counsel that their firm recommends or refers. Advisors are enticed by the word “free”, and they are lulled into a (false) sense of comfort and security knowing their lawyer is liked by his/her financial services firm, sounds smart and polite, is experienced, and reassuring that all will turn out okay.

But the reality is different. Let’s explore four areas that should cause advisors to run (not walk) from their firm-recommended, “free” legal counsel: (1) legal counsel’s inevitable role as the “spy among us”; (2) legal counsel’s inadequate representation disclosures; (3) legal counsel’s half-baked defenses and discovery efforts; and (4) legal counsel’s pressured settlement, limited trial/arbitration representation and expungement request, and the reputation-damaging amended Form U-4. Once those three areas are carefully considered, it becomes apparent that “free” legal counsel offered by the firm can often come at great cost to a financial advisor, sometimes even imperiling his or her life-long career.

First, an advisor’s firm is paying for legal counsel so that the firm can control that counsel, direct the strategy and defense, and be kept fully apprised of all legal and factual developments. Firm-paid for legal counsel thus plays the role of the “spy among us” or the “fly on the wall” because everything an advisor reveals to his/her purportedly trusted lawyer “can and will be used against you.” Firm-provided counsel inevitably learns all of the good, bad and ugly facts of an advisor’s case. Regrettably, that “information pipeline” flows back to the advisor’s firm, its legal department and branch management. And make no mistake: firms will not hesitate to use that information to throw the advisor “under the bus” if the firm or management’s neck is on the line. Advisors must avoid this by retaining a real, ethically bound lawyer who respects and preserves their confidences.

Second, when a client retains an attorney, a written engagement letter is encouraged if not required in all jurisdictions. Any issues or concerns related to that attorney-client representation must be detailed in what is known as a “Conflicts” letter. The letter is designed to educate the client as to potential conflicts of interest, possible lapses in the exercise of independent judgment or loyalty, and possible issues with the degree of zealousness a lawyer may have in defending that client. The letter must identify those conflicts that are present now or which may be present in the future. Additionally, the lawyer must disclose alternatives (such as selecting other counsel) to avoid such issues. Finally, the lawyer must obtain the client’s knowing, complete, and express written consent to proceed with brokerage firm-referred counsel despite the disclosed shortcomings. Regrettably, we have seen several instances in which there are no such conflicts letters, let alone written engagement letters, in clear breach of numerous ethical obligations, leaving advisors ignorant as to what lies ahead.

Third, a lawyer with “one arm tied behind his back” is not worth the “free” price he or she charges. That is apparent when the lawyer files the Answer to a customer complaint. A proper Answer should detail all available defenses, including those that possibly may cast a negative light on others, such as superiors at the advisor’s firm. However, that does not happen with firm-paid for legal counsel because that lawyer effectively is “serving two masters” (the rep and the firm paying his/her bill). As a result, any defense that exclusively would help the advisor – such as branch supervision, compliance approval and oversight, product due diligence and approval, margin approval, risk assessment and approval – fall by the wayside because the conflicted legal counsel does not want to implicate the firm paying his/her bills in the pending legal action, prompt a disciplinary referral, or alert claimant’s counsel to add parties and arguments in subsequent complaints or arbitration claims. The same lack of zealousness applies to discovery of documents and information. Where an independent legal counsel would leave ‘no stone unturned” in obtaining evidence to prove all of the defenses at trial/arbitration, conflicted counsel ignores all of that and sticks to the firm-directed playbook..

Fourth, such handicapped counsel takes the same, limited approach in settlement negotiations and in trial/arbitration. An egregious deficiency occurs when the lawyer advises the client to “contribute something” to a settlement, which should rarely, if ever, happen. Worse, the notion that a customer complaint should be expunged always should be a priority, but less than zealous firm counsel typically does little more than mention it briefly in closing arguments. That is an unfortunate deficiency because the outcome of the proceeding (judgment/award), without expungement granted, ultimately is recorded on the advisors’ Form U-4. With BrokerCheck and social media solicitation by claimants’ attorneys, the harm from that often is perilous and sometimes career ending.

Two final points deserve mention. When advisors decline “free” legal counsel and instead select their own counsel, whom they pay for their services, their legal counsel can (and, in our experience, does) function with collegiality and professionalism in collaboration with counsel for the advisor’s firm. Indeed, the two attorneys typically enter into what is known as a Joint Defense Agreement, which allows counsel to choose to share certain limited information with each other without waiving each of their attorney-client privileges as to their communications, but while still remaining “true” to each of their own clients.

Likewise, this article assumes that the advisor is a named defendant/respondent in the litigation/arbitration. Should the advisor not be named, but simply be the subject of the claim or complaint against his/her firm, we still strongly recommend that independent counsel serve privately, in a consulting capacity, during the proceeding. Later, at the conclusion of the trial or arbitration hearing, the advisor’s counsel formally will enter an appearance in order to publicly represent the advisor for purposes of seeking expungement.

“Free” normally is good, but not when it comes to firm-provided, “free” legal counsel defending an advisor. For that, “You get what you pay for”! Advisors, retain your own counsel!


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