Terra Extraneus

American society seems to have accepted that one can be “voted off the island.” But, should that be allowed in relation to government employment that is protected by due process rights?

The purpose of hedging governmental employment with due process rights is to prevent jobs from being used as patronage every time the political winds shift. On a university campus, such rights are often needed to protect free speech.

Indeed, in my law practice, I have been engaged to coach professors through various types of employment disputes without resorting to litigation. I have to admit that a warring faculty is a pretty cutthroat group to be among. It would probably take a sociologist rather than a trial lawyer to explain it, but I have seen it often enough to be impressed by it.

Along came the North Carolina Court of Appeals in Leonard Bernold v Board of Governors of the University of North Carolina, which affirmed the lower court and Board of Governors decision to terminate a professor on the grounds of “lack of collegiality.”

I cannot imagine a more subjective basis for termination, short of taking a vote among a faculty to determine if a professor was “liked” or “disliked.” For this reason, I cannot imagine that such a basis for termination actually comports with the protections one thought would have been enshrined in due process rights. It should be noted that the lack of collegiality charge was dressed up with the allegation that it was disruptive to the faculty and had gone on for three out of five prior employment years. But, “disruptive” is hardly less subjective. That it had gone on for awhile does not seem to alter the subjective nature of the charge.

There had been a full hearing and assuming there was a transcript, so it seems logical to conclude the court opinion simply left out the “juicy” tidbits that might make the subjective into the objective, or at least more substantive. But, more likely, this is the direction we are headed with due process rights. We are, in fact, abolishing them by demoting them to the level of mere feelings.

[Hat tip to Professor Ross Runkel.]

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In Colorado, at least, it might matter. In Dish Network v Altomari (Colo. Ct. App. June 25, 2009), the question was whether the employee that supervised some people, probably a sales staff, was in “management.” If the employee was in management, then under the Colorado non-compete statute, a non-compete against the employee was enforceable. The Court of Appeals reversed the trial court and held the employee was in management.

The term “management” is not defined in the Colorado statute. However, it is pretty clear the court is confused about what constitutes “management.” The only employees in “management” are those who can bind the company or otherwise decide company policy, typically corporate officers and directors. That would be a logical purpose of the statute. Applying the statute to middle or lower tier supervisors turns the statute from a fair allocation of business risk to a draconian labor control tool.

Of course, will Financial Advisors in Colorado with titles like “Vice President” or “Director” once again face non-compete risks when they trade jobs? Protocol firms may not be tempted but many will be in the is shaky economy. Financial Advisors in Colorado should try to wheedle an email or something that indicates they are not in management, or obtain a page from a firm policy manual that says something similar.

(Hat Tip: Professor Ross Runkel’s employment law summaries)

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The case reported by Professor Ross Runkel issued by a New Jersey appellate court, Stengart v Loving Care Agency, held that privileged communication by the former employee with her attorney through her employer’s computer retained its privilege.

The case was interesting because the employee made the same mistake many people make. The employee was using a web based password protected email account believing that no trace of the email on the outside website was being left on the computer owned by the employer. That was untrue. Because the employee was viewing web email through the browser on the employer’s computer, the computer captured a picture of every image the employee saw, thus preserving it for the employer’s computer analyst to retrieve.

The moral of the story: do not use an employer’s computer for anything you want to remain private. Go outside of the employer’s hardware.

Most employers are not set up to retrieve or view web images viewed by the employee, but that does not mean a computer expert cannot retrieve the images from the computer when desired. Just because compliance systems are not set up to see every image the employee can see, like web based email, does not mean the email, once viewed on the employer’s computer, cannot be viewed by a computer analyst.

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The investment banks, the wirehouses, and the large broker-dealers, which have all but ceased to exist, had a love - hate relationship with “at will” employment law. Even the late and great Merrill Lynch, once the “white hats” in the industry, struggled with it from time to time. In the 2000s, however, Merrill Lynch seemed to lead the industry toward a reasonable set of protocols by which stock brokers, registered representatives could change jobs. Merrill Lynch, at the end of its corporate life, would not engage in retaliatory litigation and disdained forfeitures of earned stock or compensation.

It remains to be seen how industry survivors will fashion their employment policies going forward. However, California courts have recently indicated a no nonsense attitude toward employment contracts containing non-compete clauses and California has always treated forfeitures with disdain. Texas, likewise, seems to have affirmed its own legal, if not moral, prohibition of anti-competitive provisions that go further than necessary to protect legitimate employer interests, such as forfeitures of earned stock or compensation.

The Texas Court of Appeals in Corpus Christi issued its 2009 opinion in Valley Diagnostic Clinic v Dougherty. While this was a dispute between a doctor and his former clinic, in which the clinic sought to forfeit earned but deferred compensation, the principles are the same for other industries. Just as the Texas State Board of Medical Examiners places certain limits on enforcement of these types of clauses, so, too, does FINRA and state regulators (even if they are not identical). Over shadowing that, however, is that the public policy of Texas, like many other states, deems “a compensation provision made only in exchange for a non-compete promise…precisely the sort of restraint of trade that Texas law prohibits.”

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In Oklahoma, on a slow news day, you can be sure each local television news broadcaster will have a story about a dog complete with video footage. Movie industry executives also seem to have concluded that movies about dogs sell tickets.

But, it now appears that human civil rights can be curtailed in the face of dog rights. The United States Court of Appeals for the Tenth Circuit reversed the federal district court sitting in Oklahoma City, in a published opinion no less, in a case styled Rajeanna Dixon v Oklahoma Board of Veterinary Medical Examiners. It took thirty pages for the Tenth Circuit to explain this. Indeed, the challenge we are now faced with is to explain why it took thirty pages for the Tenth Circuit to reduce the civil rights of a state employee to zero, elevate dog rights to greater than constitutional importance, and zero out the First Amendment in the absence of a national security consideration. Oh, and the Central Intelligence Agency is involved, so keep reading.

Ms. Dixon was fired from her secretarial job at the Veterinary Board because she allegedly discussed an ongoing investigation into dog fighting and dog doping with her own veterinarian, who happened to be a veterinary association member responsible for legislative over sight of the Veterinary Board and its budgets and powers, largely because she was concerned the agency, which only had four employees, including her, was stepping out side of its mandate. Also, she allegedly told the veterinarian that the board’s investigator was now carrying a gun even when he went to meet with veterinarians.

The federal district court denied the summary judgment motions asserting qualified immunity presented by the board and the board appealed. Thus, this opinion by the Tenth Circuit was doubly weird because normally the mere denial of a summary judgment motion is interlocutory and not appealable.

It has to be noted that the investigation of the Veterinary Board into dog fighting and dog doping resulted in an arrest, probably by another law enforcement agency, that was reported in the news media. It has to be noted that Ms. Dixon comments on the investigation, if they occurred, were made after the news media report made the investigation, at least in part, public. Indeed, the news media report suggests it had become a matter of public concern, at least on a slow news day, and thus Ms. Dixon’s comment upon on it should have been presumptively protected, and not used as a pretext for firing her.

But, the Tenth Circuit concluded that there were “unprotected” statements, in addition to protected ones. In other words, as soon as the Tenth Circuit found that the First Amendment did not reach these statements, then Ms. Dixon could be fired for speaking about the Veterinary Board if the interests of the Veterinary Board, as a government employer, outweighed Ms. Dixon’s right to free speech. The Tenth Circuit concluded that Ms. Dixon’s other comments were “trivial in nature.” (“Serious complaints about discrimination can certainly be a matter of public concern, but the record reveals discussion of nothing more than a few stray comments.”) The right of the state government agency not to have a secretary discuss agency business, public or non-public, was deemed greater than the First Amendment protection.

Comically, the Tenth Circuit put the Veterinary Board of Oklahoma on a high investigatory pedestal when it parenthetically stated: “That is why the CIA regularly responds to inquiries by saying it can “neither confirm nor deny.” Admittedly, sitting in Denver, the Tenth Circuit might not be completely aware that the Central Intelligence Agency of the United States and the Oklahoma Veterinary Board are not handling matters of equal importance. That might explain the lack of a sense of perspective in the opinion and may be the loss of perspective in government generally. Apparently, we dare not have transparency in any government agency, even one that abandoned its mission to regulate veterinarians in favor of investigating dog fighting rings. Apparently, our society will come crashing down around us if we have First Amendment rights about state agency veterinarian medicine regulation.

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Imagine that you had a right to exercise certain stock options that you had earned. Imagine that the contract under which you were going to exercise the stock options gave you a three month window in which to do it, but that no one sent you a copy of the contract or the amendment that contained the three month limitation. Assume that the stock issuing company admitted that you never got the amendment and could not have known about the three month exercise window. Imagine that after you tried to exercise, you were told you were outside the three month window and your options had been cancelled. Breach of contract, right? All the elements are there: contract, breach of contract, and now you just have to prove damages.

Well, imagine the stock issuer puts on an expert that testified that no sensible investor would have exercised those options because at best, at the time, they were a break even proposition. Therefore, you have no damages. The expert was not allowed to give an opinion that you would not have exercised the options.

Surely that testimony was irrelevant, right? Just as your damages in most state would be limited to delivery date pricing, i.e., the price of the stock on the date you should have exercised but could not because of the breach of contract brought about by failing to give you a copy of the contract amendment, the other side should not be allowed to speculate about whether you would have exercised or allowed the options to expire, right?

The United States Court of Appeals for the First Circuit, in First Marblehead Corporation v House, held the expert’s testimony was admissible and would support a verdict that the employee had no damages because the expert testified a reasonable investor would not have been likely to have exercised the stock options because at best it was a break even proposition.

The testimony was not that the employee could not financially afford to exercise. The testimony was not that the employee would have lost so much money exercising that the exercise would have been uneconomic. The testimony was just that it would have not been attractive enough for the reasonable investor. That seems speculative. Worse, it allowed a party to breach a contract with impunity.

Of course, as it turned out, it would have been a good investment because several years later when the company went public the stock value would have been multiples of the cost of exercising.

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As an Oklahoma based trial lawyer, I do not have the luxury of a continuous stream of cases all in the same genre or even area of law. Largely originating on one of the three coasts (including the Gulf Coast), cases usually come in waves. I just completed a three year group of 41 cases, ten of which were tried, against Goldman Sachs & Company. This particular wave of cases was actually the second tidal surge because during the three years prior to the just concluded three years, I was counsel against Goldman Sachs in a predecessor wave of cases.

Goldman Sachs manages its exposure somewhat idiosyncratically and not quite like the other wire houses or other member firms in the securities industry. For instance, Goldman Sachs is far more concerned about its image than it is winning or losing, or even the economics of any particular case. Because the securities industry effectively gags its associated persons thus creating a conspiracy of silence, Goldman Sachs can litigate endlessly with associated persons and face little risk that the image it jealously guards will be tarnished by inconvenient media exposure.

The news media has no effective means of penetrating this conspiracy of silence, because no member firm is going to allow its associated persons to speak freely to the media, even about other member firms (or previous employers). Also, one has to wonder if the media will even try to break the code of silence, because of the possible back lash by one or more member firms.

Abusive personnel practices have been a hall mark of about half the securities industry, and avoided by the other half. Goldman Sachs’ abuse of registered representatives was largely the result of institutional errors made when investment bankers attempted to “fix” the firm’s “brokerage” and “advisory” personal wealth management business. It reminded me of watching a newly minted teenage driver. You constantly have to remind them at first to look back over their shoulder while backing out of the driveway. Goldman Sachs was so intent upon socially engineering the lives of its registered representatives that it back over half of them.

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During the National Public Radio program Morning Edition, Liz Ryan, a columnist for Business Week, was interviewed by Steve Inskeep, and you can find the interview here. According to the NPR story, a company called Clarian Health first said it would dock the wages of employees who are overweight or who smoke. Then it backed away from that plan. When asked if such a wage withholding plan was lawful, Liz Ryan said it was.

She is wrong.

In most states, it would be illegal by statute to withhold wages without written consent. Thus, when or if someone objected to Clarian Health’s announced plan, Clarian Health no doubt got a refresher course on these little used statutes.

For in-house corporate lawyers who often must be “jacks of all trades,” Gordon E. Jackson’s book, Labor and Employment Law Handbook, Aspen Publishers, is a good desk reference to keep around to avoid such errors. Liz Ryan is a well-regarded human resourcees expert who writes a blog on workplace matters — and is a professional opera singer, as well! However, she is not an attorney. If Ms. Ryan is going to grant news interviews on employment law, she might want to grab a copy of Jackson’s handbook, too.

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Karen Donovan at Registered Rep reported the recent study issued by a Washington, DC law firm that concluded that fines and sanctions were less when the enforcement issues were litigated than when imposed by settling with FINRA (“Financial Industry Regulatory Authority”). FINRA, according to Donovan, rebutted the study by merely sloughing it off as a lawyer’s marketing dream.

I have not done a study. Indeed, the study that was issued by the law firm reported by Registered Representative only looked at 55 panel decisions from June 2006 through June 2007. That means the sweep of time was not considered and it means the recent merger of NASD enforcement with NYSE enforcement was not evaluated. In my own experience, there was a difference between the two.

FINRA investigations were usually conducted initially by a compliance professional that was not a trial lawyer and NYSE investigations were often conducted by lawyers, some of whom had enforcement trial experience. Both were relatively easy and fair to deal with prior to filing of a formal enforcement proceeding, and lots of matters could be settled at that stage. Once, however, the formal enforcement action was filed and pending, both were much more difficult.

My own experience has led me to believe the following about enforcement actions generally, and I believe this will generally be true of FINRA enforcement actions.

1. Enforcement proceeding panels usually have at least two industry members on the panel with an enforcement department attorney acting somewhat as an administrative law judge. Industry members are more likely to buffer the harshness of sanctions even in the presence of a stifling enforcement department panelist.

2. The real problem in enforcement actions for the licensed professional is financing the defense if the supervisor or employer will not do so. FINRA has finite resources to allocate, too, but in any given case the licensed professional is out classed. That does not mean that FINRA won’t be tempted to pick off the weak, the sick and aged like any good buffalo hunter, and avoid the bulls and mastodons running with the herd.

3. Most licensed professionals that end up in enforcement proceedings are probably there because of a lapse in integrity, but too many are there for an error in judgment that may not have been their fault. While the industry is retreating from its hand shake business model, that is still the dominate platform. It is a fertile ground for hindsight compliance reviews, customer complaints and disinterring the financial advice from the then prevalent circumstances.

4. Some enforcement actions are brought because of a lack of perspective. A lapse in judgment, i.e., a moment of carelessness, should not result in the same sanctions as intentional or even criminal conduct. If there was no loss attributable to the violative conduct, it almost always means the conduct resulted from unintentional rather than intentional conduct.

These are some, but not all, of the considerations that would create an environment in which enforcement proceedings might result in lesser sanctions or settlements result in harsher sanctions. Clearly, some have nothing to do with the facts of the case. None of them have to do with whether they are studied by lawyers or sociologists.

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The newest published decision regarding U-5 defamation of a terminated registered representative is like an aquarium, for once you can see all of the fish swimming about.

Deborah Galarneau v Merrill Lynch, Pierce Fenner & Smith, Inc. was issued by United States Court of Appeals for the 1st Circuit. The case did not go to industry arbitration because it included a federal discrimination claim. But, the only claim that survived motion practice was the claim that the Form U-5 filed by the employer was defamatory.

The case was tried and decided under the law of the state of Maine, which extended to the employer a qualified privilege, which required the employee to prove that the U-5 entry was false and that the entry was made with actual malice. On appeal, the employer sought 1st Amendment protection for its U-5 filing, but that rather bizarre argument was too little too late.

The 1st Circuit found that the record in the trial court before the jury, indeed, did contain evidence supporting the jury verdict. The employer on four occasions conducted management review of the trading, approved it each time, issued comfort letters to the customer and denied in written responses to regulators that the trading was in anyway improper.

Meanwhile, Ms. Galarneau was summoned to New York by her employer to be interviewed by the Office of the General Counsel. The lesson here for registered representatives: prepare for such an interview. Engage counsel to assist in the preparation, if necessary. Do not take counsel to the interview by the employer (employees that feel they need to take a lawyer to a meeting with their employer should prepare their resume). At the meeting, she allegedly admitted exercising time and price discretion.

But, on her U-5, in addition to listing exercise of time and price discretion as a reason for termination, the employer listed “inappropriate trading,” the same trading approved four times by management, as a reason for termination. The predictable result was that no other firm would consider her.

One of the interesting things contrasted in the opinion was the over reaction by in house counsel. In house counsel rebutted the state regulatory inquiry and then permitted the regulatory response to be contradicted in the U-5. In an awkward effort to defend it, the employer on appeal tried to argue that only after the employer received a report from its outside accounting vendor, Bates Capital, did it become clear that some of the trading was “inappropriate.” Because the employer is the largest broker dealer in the world, it is laughable to think its supervisory accounting systems cannot detect “inappropriate” trading, especially since that trading has to be approved one trade at a time by a local supervisor and further stretches credulity beyond the breaking point to think a multi-billion broker dealer and investment bank must rely on a tiny non-public accounting vendor to learn the truth.

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After the foregoing was posted, Investment News published its news blurb on the opinion which you can find here. While I have great respect for this publication, the title of the article implies the entire judgment was reversed. The article seems to spin the opinion (calling it a “report,” possibly indicating a lack of familiarity with the judicial system) favorably to the employer. However, the $850,000 verdict was sustained. The $2.1 million punitive damages award was reversed. The plaintiff was able to prove actual malice or the verdict for compensatory damages would not have been sustained. The plaintiff was unable to prove the U-5 defamation was intentionally designed to make the plaintiff unemployable, so the punitive damages award was not sustained.

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