Will Things Get Wacko at Wachovia Securities?

By David Gehn, Esq. dgehn@gkblaw.com and Bill Singer, Esq.bsinger@rrbdlaw.com 
Messrs Gehn and Singer are partners at the New York City securities-industry law firm of Gusrae, Kaplan & Bruno, PLLC. 

The news is out: Wachovia Corp. is purchasing Prudential Financial Inc.'s retail brokerage unit. Trouble is, the game of corporate musical chairs is not going to be as simple as stopping the music and eliminating whoever's standing. Preliminary reports warn that there will be a reduction of 1,750 jobs and 131 branches at Wachovia Securities, the new entity. During the past few years (and certainly as recently as 2001), Prudential aggressively recruited sales personnel in order to bolster its assets under management and balance sheet, purportedly, in anticipation of its widely publicized multi-billion dollar initial public offering ("IPO"). 

In furtherance of those efforts, Prudential enticed reluctant candidates away from other BDs by offering highly competitive up-front checks (defined by Prudential as "transitional compensation"), along with promises of IPO stock, a wide array of products and enhanced services, and substantial deferred ("back end") compensation. Assuming that some of those who were so aggressively recruited may now be shown the door, it would seem that we should expect a rash of litigation surrounding these soon-to-be former employees.

Do I have to repay the unaccrued balance of the transitional compensation even though I didn't quit?  Since they're preventing me from finishing my term of employment, why should they be able to screw me out of my back-end package?

A widely used version of a recent Prudential employment agreement contains an assignment provision --- language that enables Prudential to effectively transfer the remaining term of employment to Wachovia Securities subject to the terms and conditions contained in the Prudential agreement. However, Wachovia Securities is not legally obligated to accept such an assignment and may decide against hiring some or all persons so covered (in fact, many among the rumored 1,750 employees to get pink slips may fall within this group). Which of course raises another question: Assuming a Prudential employee covered under an employment agreement is not assigned to Wachovia, what happens to the acceleration clause requiring early repayment of transitional compensation? 

Typically, a "lender" is entitled to demand immediate (accelerated) repayment of a loan in the event of certain specified events (rather than await the expiration of the agreement's term). On Wall Street, BDs usually draft acceleration clauses that are invoked upon an RR's resignation, termination for cause, or filing for bankruptcy protection. However, what happens to the acceleration clause when the employee doesn't' quit and isn't actually fired --- when the former employer ceases to exist as an ongoing entity? Similarly, suppose former Prudential RRs are offered employment at Wachovia Securities, but not on the terms and conditions they agreed to at Prudential and memorialized in an employment agreement. The Prudential corner office with two dedicated sales assistants becomes a Wachovia Securities cubicle with no support staff. Or, what if Wachovia Securities is willing to accept the assignment of a Prudential employment agreement, but only pursuant to a lower payout "grid". 

If the Prudential employees refuse to such a renegotiation of their terms of employment, is that sufficient basis to deem them as either resigned or terminated employees --- and to cite that circumstance as triggering non-compete clauses or acceleration provisions? Furthermore, is that justification for Prudential to refuse to pay any promised back-end compensation? And imagine the somewhat comical situation of a former Prudential employee who left that firm in order to join Wachovia --- and is presently being pursued for unpaid transitional compensation by Prudential --- which may soon be replaced by Wachovia Securities. Is a "fire sale" in the works at Prudential? 

Right now there are likely a number of former Prudential employees being pursued in arbitration by that BD for unpaid transitional compensation. Will Wachovia Securities assume the right to pursue these pre-merger employees in order to attempt to recover the outstanding receivables? Pointedly, the unpaid transitional compensation owed to Prudential by such individuals does not represent an out-of-pocket cost (or loss) to Wachovia Securities. Furthermore, Wachovia must evaluate the wisdom of allocating time and money towards collecting Prudential's debt, while otherwise attempting to digest the multi-billion dollar acquisition. Is it possible that Prudential might offer to deeply discount presently contested payments in order to realize as much value with the least amount of pain? Perhaps Wachovia Securities might be wary of the public-relations black eye of being seen as hammering out-of-work employees for repayment of transitional compensation? 

Who's going to prosecute the arbitrations? 

Some of Prudential's salaried employees (among which include staff attorneys, paralegals, compliance examiners, etc.) could be terminated as economies of scale are implemented. Thus, the attorney currently representing Prudential in a pending transitional compensation arbitration may no longer be employed when the case is scheduled for a hearing. Similarly, if the Prudential litigation staff is so familiar with their extensive docket of filed and to-be-filed cases, might that not serve as a reason to, perhaps, terminate redundant Wachovia staff?

Which of course raises the question as to where the balance of power in Wachovia Securities' litigation and compliance departments will ultimately fall: with the existing Prudential or the existing Wachovia crew? One can imagine the infighting and backstabbing this will (or has already) set off. Of course, should Wachovia Securities assign the Prudential caseload to new counsel, imagine the glee on the defense side when veteran industry lawyers realize that unfamiliar counsel will become their adversary.

 And who's going to pay to defend ongoing lawsuits and arbitrations? 

Similarly, it's a common occurrence for BDs and their registered persons to be named in a whole host of litigated matters, both in court and arbitration. Usually, the BD picks up the costs attendant to defending itself and its named employees (often both past and present). With the announced merger of Prudential into Wachovia Securities, might there not be some desire to settle those nettlesome matters that are eating up legal fees? Supposing Prudential settles out of the case, but its registered person is left to fight on. It's unlikely that Wachovia Securities will continue to pay for his or her legal representation. Additionally, absent a written agreement to the contrary, there's no guarantee that Wachovia Securities will continue to foot the legal bills for present/former Prudential employees in any ongoing case.

 Permission to treat as a hostile witness? 

A typical defense (even a counterclaim) raised on behalf of RRs defending against demands for repayment of transitional compensation, is the allegation that former branch management fraudulently induced the respondent (RR) to leave a previous employer and join the claimant's firm. Obviously, Prudential attorneys typically prepare branch management to testify in a manner beneficial to Prudential. However, since initial reports state that 131 branches are scheduled to be shuttered, it's likely that some managers will probably be terminated (or demoted). Accordingly, key witnesses for Prudential may be out of work and desperately trying to secure employment at another broker-dealer in town --- you know, the one where most of the terminated Prudential employees managed to find a job. Keep in mind that this scenario will likely play out even lower down the feeding chain: Assistant managers, sales assistants, secretaries, etc. How cooperative will these former employees be in Wachovia's collection efforts, particularly if only paltry severance packages are offered? 

So, it's musical chairs at Prudential and Wachovia. Will you wind up in the hot seat?