Citi vows repayment over class action

After winning dismissal last month of a class action brought by six former Smith Barney brokers, Citigroup Inc. is vowing to go after the brokers for legal fees.

In dismissing the case — Banus v. Citigroup Global Markets Inc. — U.S. District Court Judge Lewis Kaplan described the suit as “baseless” and “an attempt to use the judicial process for the quite improper purpose of simply stalling [Citigroup’s] effort to collect the money it is owed” from balances due on promissory notes.

“Citi intends to enforce its contractual right to recover attorneys’ fees and costs from plaintiffs for pursuing this meritless litigation,” Citigroup spokesman Alexander Samuelson said in a statement. “It is clear from the terms of the promissory notes they signed that these financial advisers are responsible for reimbursing Citi the hundreds of thousands of dollars the company was forced to incur in defending the lawsuit.”

Citigroup would have to file a motion with the court for attorneys’ fees.

As of last week, the firm hadn’t yet made such a request.

Mr. Samuelson declined to comment about when Citigroup might file.

Getting hit for costs “is a risk — it’s always a risk” in pursuing litigation, said Mark Thierman, founder of the Thierman Law Firm and the lead plaintiff’s attorney on the Banus class action.

Mr. Thierman, who made a name for himself among brokers for successfully suing Wall Street firms for overtime pay, vowed to appeal Mr. Kaplan’s ruling.

An unrelated Supreme Court case, decided last month, dealt with whether a class action involving the maritime industry could be heard in arbitration. Mr. Thierman said that the ruling will give him the ammunition that he needs to overturn Mr. Kaplan’s ruling.

Legal observers never gave the Banus class action much of a chance.

The suit argued that the acceleration clauses within upfront notes, which require immediate repayment if a broker leaves for any reason, were illegal.

Thomas Banus, the original plaintiff in the class action, is a broker who went to Smith Barney in 2004 with a $46,000 upfront bonus. He left the firm in 2006 owing $39,000 on the unforgiven balance.

Citigroup sued him, and last Aug. 12, an arbitration panel ordered Mr. Banus to pay up. On the same day, he filed his claim in court.

A DELAYING TACTIC

The claim was designed in part to give Mr. Thierman a tool to use to delay arbitrations that Citigroup had filed against brokers.

He cited a provision in the Financial Industry Regulatory Authority Inc. arbitration code that reads, “Any claim that is based upon the same facts and law, and involves the same defendants as in a court-certified class action or a putative class action … shall not be arbitrated.”

Citigroup’s attorneys were livid about the legal ploy.

The delaying strategy “is particularly troubling given the prior admonition the court has issued to counsel who represent financial consultants and file baseless and frivolous lawsuits for the purpose of delaying or avoiding the repayment of their clients’ promissory notes,” Citigroup argued in a legal filing in the case.

Mr. Kaplan agreed and shot down Mr. Thierman’s theory that a pending class action can freeze arbitration hearings.

Although Mr. Thierman was unsuccessful with that argument, at least one attorney was successful: David Ghen, a member of Gusrae Kaplan Bruno & Nusbaum PLLC.

Just before the Banus dismissal, an arbitration panel told Mr. Gehn’s client, former Smith Barney broker John Acosta, that he didn’t have to file a response to Citigroup’s claim for repayment, and that neither party could initiate discovery.

Mr. Ghen said that the order amounted to a stay of his client’s case based on the fact that the Banus class action is pending.

With the Banus case dismissed, though, Mr. Acosta will have to proceed in arbitration.

Apparently, so will any other brokers who are seeking a stay.

True, Mr. Thierman or other lawyers could file another Banus-like class action against a brokerage firm and again ask arbitrators to stay related broker note cases.

He said that he hasn’t yet filed another one — but he might.

“Maybe in California [so] I can keep [the case] out of unfriendly [legal] territory” such as New York state, Mr. Thierman said, where courts are seen as business-friendly.

But if Citigroup is successful in chasing down his clients for legal fees, it could put a damper on any similar suits.

E-mail Dan Jamieson at [email protected].