Fate of book rests on coin toss

When they started their partnership in 1990 at Morgan Stanley, brokers Gerald P. Kessler and Paul S. Baker probably never imagined that the dissolution of their book of business — $470 million in assets, producing an estimated $3 million a year in fees and commissions — would hinge on a coin toss.

But that is what happened to the two Jenkintown, Pa.-based Wachovia Securities LLC reps, according to a recent arbitration decision.

The relationship of the advisers, who joined St. Louis-based Wachovia in 2005, apparently soured the following year, and Mr. Kessler later filed an arbitration claim against Wachovia and Mr. Baker. In the 2007 claim, Mr. Kessler alleged that there was a failure to divide client accounts under the original partnership agreement as well as a failure to transfer accounts and pay commissions and fees.

Both Mr. Baker and Wachovia denied those allegations and filed counterclaims alleging a breach of contract by Mr. Kessler, who denied the assertions.

Three arbitrators with the Financial Industry Regulatory Authority Inc. of New York and Washington last month said that the two reps should split the book of business, with each getting 50%, according to the arbitration decision.

But in an odd twist, the arbitrators agreed that the two reps would toss a coin to see who went first in picking the clients they once shared, with Mr. Kessler calling the flip.

The award was filed as “stipulated,” which means that all parties — Wachovia, Mr. Kessler and Mr. Baker — agreed to its terms beforehand, lawyers said.

That left some attorneys for plaintiffs wondering about the fate of the brokers’ clients.

“A firm like Wachovia should be embarrassed to put in writing that they’re deciding to allocate customer accounts with the flip of a coin,” said Scott Silver, an attorney with Blum & Silver LLP in Coral Springs, Fla. “Is Wachovia going to tell the customers how the accounts were reassigned? This award reads like they’re trading baseball cards.”

“It sounds to me like the arbitrators are abdicating responsibility,” said Thomas Ajamie, attorney at Ajamie LLP in Houston. “It takes a lot of work to determine which clients belong to which broker.”

And from the registered reps’ perspective, a great deal was dangling on chance.

“That would be an important coin flip,” said Rick Peterson, president of an eponymous Houston recruiting firm. “One client account could be 20% of the book of business.”

As the average age of retail registered reps and financial advisers continues to rise, the industry could see more bitter breakups, another recruiter said.
“It’s a bigger problem going forward,” said Danny Sarch, president of Leitner Sarch Consultants Ltd. of White Plains, N.Y. “It’s the aging of the industry and what can happen in the vicissitudes of a relationship.”

Firms are looking to match brokers new to the industry with veterans, Mr. Sarch noted. And as years go by, the younger partner may wind up doing most of the business yet still receive just 50% of the revenue, even though the older partner is spending more and more time playing golf, he said.

“The young guy resents that,” Mr. Sarch said. “But it’s so hard to start in the business, the young guy has to join a team.”

Partnerships and teams at broker-dealers come in many shapes and sizes, and none are immune to problems, a consultant said. “Firms have hundreds, thousands of people teaming up,” said Andy Tasnady, founder of Tasnady & Associates LLC, a Port Washington, N.Y., firm that consults with broker-dealers on compensation.

“There is any combination of arrangements, from father-son to husband-wife, from being equal partners to junior-senior partners,” he said, adding that any kind of partnership could hit a snag. “Firms have support staff, internally referred to as ‘divorce court.’ It’s like a relationship that goes sour. You need a third party to say, ‘Not everyone is getting 60%.’”

Although many partnerships and teams work well, a rep must enter into partnerships or team relationships with the utmost care, industry observers and recruiters said.

“Firms have partnership coaches, but I don’t know if they have divorce classes,” Mr. Peterson said. “Unless there’s a personal issue, the breakup is invariably caused by one thing — one partner thinks he’s working harder than the other guy.”

The arbitration decision did not list the details or reasons leading to the split in the partnership of Mr. Kessler and Mr. Baker, and Wachovia Securities typically does not comment on arbitration decisions, said spokesman Tony Mattera.

Attorneys for the two brokers, Harold Semanoff for Mr. Kessler and Joseph A. Dougherty for Mr. Baker, did not return calls last week to comment.

However, the arbitration decision made it clear that after the coin toss, which took place at the end of February, each rep had to promise to behave and to stay away from the clients the other won.

“Baker and Kessler shall not disparage each other to any customers, fellow employees or any others,” the award said. The two brokers also “shall not initiate any contact with or solicit any customers allocated to the other and shall not otherwise interfere with each other’s relationships with any customers serviced by the other.”

E-mail Bruce Kelly at [email protected].

Related Topics: Wachovia