Firm fires broker who complains of market timing

Stein v. Prudential Secs., Inc., N.Y. Stock Exchange.

Firm fires broker who complains of market timing: Defamation: Wrongful termination: Economic losses Reputation damage: Arbitration award.

In 1998, a large securities firm, Prudential Securities, Incorporated, hired Stein, who had handled over 1,000 clients at another securities firm. Stein learned in 2002 that some coworkers were market timing and late trading, both of which are prohibited. Prudential failed to do anything to correct the actions, allegedly because it wanted to inflate its revenues in preparation for an impending merger with another company. Stein contacted several newspapers to tell them what his coworkers were doing, but none of the newspapers expressed an interest in the story. Stein also told his assistant, Petherick, that he had spoken with the reporters.

Shortly afterward, two of the brokers who were allegedly engaging in the prohibited trading confronted Stein about contacting the papers. The branch manager then called Stein into his office and told him to “keep his mouth shut,” threatening that “he was history if he was talking to the press.”

In early 2003, the SEC began auditing the firm on unrelated matters. Prudential confiscated some of Steins files after the SEC received an anonymous letter saying it should investigate Stein and one of his accounts. The account was not set up by him, but by Petherick, who had allegedly created it and forged Stein’s signature. In its investigation into the matter, the company failed to speak to the client, who later sent a letter to the manager and allegedly admitted he had forged his deceased father’s name and instructed Petherick to redeem a bond in the father’s name. Despite receiving the letter, Prudential told Stein that he either had to resign or be terminated, without giving him a reason.

A few minutes after Stein was terminated, the firm’s other brokers immediately began calling his clients to convince them not to leave their accounts with Stein. The brokers told Stein’s clients that he was terminated for “improprieties.” They also allegedly told some clients that they should review their accounts to make sure no money was missing because Stein was terminated for “trading stocks in dead people’s accounts.” The clients chose not to transfer their accounts.

As a result of Prudential’s damage to his reputation, Stein, 47, retained only 50 of his estimated 600 accounts. He had been earning about $852,000 annually at Prudential but earned only about $264,000 in the year after he was fired. His lost income is estimated at about $3 million.

Prudential later filed a form with the state saying that Stein “violated firm policy relating to new account documentation.” Consequently, the state required Stein to testify as to the circumstances surrounding his termination. The state found no wrongdoing on Stein’s part but took no action against Prudential until a newspaper informed the state that it was planning to publish a story about market timing by various firms. An SEC investigation later resulted in civil fraud actions and criminal charges against Prudential and its brokers.

Stein filed an arbitration claim against Prudential and several brokers, alleging defamation in falsely and maliciously stating in the form that he violated firm documentation policy and in making false statements to his clients. Claimant also alleged violations of the state unfair trade practices act, interference with prospective economic advantage, and injurious falsehood. Further, claimant argued that under defendants’ arbitration clause, it had to provide him with a discernible cause for his termination.

Defendants contended claimant was fired for violating firm policy and not because of his whistle-blowing. They also denied that the brokers made derogatory comments to claimant’s clients. Defendants then filed a crossclaim, seeking to recover the pro rata share of his commissions.

The arbitrator awarded claimant about $1.75 million. Claimant’s expert was William E. Harris, forensic economics, Philadelphia, Pa.

Defendants’ expert was Michael Soudrey, forensic economics, New York, N.Y.


Claimant’s Counsel

Alexander J. Palamarchuk, Elkins Park, Pa. Lisa G. Faden, Elkins Park, Pa.