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Settling Raiding Cases in the Securities Industry

Dana N Pescosolido


  • Since the adoption of the Broker Protocol in 2004, the success rate for claimants in raiding cases has roughly halved to about 51%.
  • Awards given are often significantly less than claimed, with punitive damages and attorney fees rarely awarded, indicating a challenging landscape for claimants.
  • Raiding cases present unique challenges such as claims for injunctive relief and non-financial motives behind pursuing cases.
  • Effective strategies include eliminating injunctive issues through separate agreements, waiting for corporate changes to stabilize before settling, addressing the psychological barrier of "double payment," and ensuring decision-makers are not personally involved in the dispute.
Settling Raiding Cases in the Securities Industry
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Raiding (hiring groups of brokers/producers from the competition) in the securities industry has been going on for decades. When it happens, the “victim” firm often files an arbitration case with the Financial Industry Regulatory Authority against the “raiding firm.” Historically, these cases have been relatively difficult to settle for four main reasons: 

1. Disagreement in the industry over what constitutes a compensable “raid.”
2. A lack of understanding as to how arbitration panels have historically ruled on such claims. While a few cases have gained notoriety, the majority of cases go largely unnoticed.
3. Unrealistic damages estimates.
4. Unique characteristics of raiding claims that represent barriers to settlement.

This article attempts to address these four issues by reference to prior pubpshed material and a recently completed study by the author of “raiding” awards since 1988. 

What Constitutes a Compensable “Raid”?
There is no black-and-white answer to this question, and there is substantial disagreement among professionals as to whether or not “raiding” is even a stand-alone claim. The definition of “raiding” has one element that everyone agrees on—the hiring away of sufficient producing personnel to inflict severe injury on a competitor’s business unit. Beyond that, there is disagreement about what constitutes severe injury, whether some element of predation or mapce is required and whether some independent wrongful acts are required.  

In 2003, the law firm Saul Ewing LLP hosted a conference in Philadelphia attended by over 50 in-house and outside counsel who reported that they had collectively handled over 500 “raiding” cases. The conference resulted in a report entitled Raiding in the Securities Industry: The Search for Consensus.

Since 2003, that report has been submitted numerous times to arbitration panels in attempts to establish points for one side or the other at arbitration hearings. The report, however, was never intended to provide authoritative rules to determine whether a compensable “raid” had occurred. But by polling the participants, who collectively had very substantial experience in this area, it did highlight areas of consensus and disagreement. For example, 84 percent agreed that if 40 percent of the production of a business unit were taken, that would probably meet the test for the “severe injury” component of a raiding claim. 

The report is useful, not because it sets out any rules but because it can serve as a predictor of what the average arbitration panel might agree with. Thus, the report can provide a good reality check to help convince a client that the probability of success may not line up with the client’s assumptions. 

How Have Arbitration Panels Ruled on Raiding Cases?
The author has studied and tabulated results from “true” raiding awards since 1988 that could be located through Internet searches and database searches. Many awards were excluded as not involving real raiding claims. Only those awards that clearly indicated that the claimant was proceeding under a raiding theory and where more than one broker/producer was involved were included in the study. The result was that only 91 awards were included in the universe. The principle findings are as follows:

1. The Broker Protocol of 2004 changed things significantly. Prior to the Broker Protocol, claimant firms won about two-thirds of the time. In other words, they won twice as often as they lost. After the Broker Protocol of 2004, however, only 51 percent of claimants won anything. One possible explanation is that since the protocol was adopted, firms have been less aggressive in their tactics, trying to conform brokers’ conduct to what is permitted by the protocol, and arbitrators may be less frequently offended by such conduct. Whatever the reason, in the present environment, when assessing the likephood of any recovery, one should look to the recent history of winning half the time for guidance, rather than pre-protocol statistics.  

2. Claimants who “won” were awarded substantially less than they were seeking. Of the 91 awards in the universe, there were 53 in which compensatory damages were awarded to the claimant. Only 37 of those 53 awards reflected how much the claimant was demanding, either in the statement of claim or at the conclusion of the hearing. In not a single case did the panel award 100 percent of what the claimant was seeking. In fact, claimants won more than half of what they were seeking only 24 percent of the time. In 68 percent of the cases, the claimant won less than a quarter of the amount claimed. The median recovery in the 37 cases for which a calculation could be made was for 20 percent of the amount claimed. (The median is the point at which half of the observations are greater and half are lower.)  

3. The dollar amount of awards was high but skewed by a few very large awards. The average compensatory damages award in the 53 cases in which awards were given was $2,494,000. However, three extremely large awards (one for $32 million) skewed this calculation. A more accurate assessment might be the median award, which was for $500,000. That is not a very big number in light of the legal bills and expenses normally associated with these cases. And remember, these days claimants have been winning anything only about half the time.  

4. Punitive damages were not routinely awarded. Even where panels awarded damages, they awarded punitive damages in only 8 of 53 cases. But in 5 of those 8 cases, the punitive damages award was for more than a million dollars. So, if the case involves egregious facts, the potential for a significant punitive damages award should be considered. 

5. Attorney fees were not routinely awarded either. In 13 of the 91 cases in the universe, the panel awarded attorney fees to the prevailing party (which in some cases was the respondent). That’s just one in every seven cases. So it’s hardly a given. 

6. Raiding cases involve prolonged hearings and significant costs. The median number of hearing sessions in the 91 cases studied was 17—that’s 8.5 full days of hearings at two sessions per day. In addition, most cases involved at least 6 pre-hearing sessions. Thirty-seven of the 91 cases involved more than 20 sessions, and 13 of those required more than 50 sessions. When one thinks about the cost in attorney fees, expert witness fees, forum costs, transcript costs, travel, and management and broker involvement or distraction, the median recovery of $500,000 gets eaten up pretty well. Regardless of who “wins,” arbitration panels in the 91 cases studied split the forum costs in half a majority of the time. The “loser” got stuck with 100 percent of the forum costs only about 36 percent of the time.  

7. Arbitration panels almost never granted meaningful injunctive relief. Only 4 of the 91 awards included any meaningful injunctive relief. A few others provided for some stipulated injunctive relief, and a couple required the return of confidential documents. This is probably because a court may already have dealt with injunctive relief, or the parties (especially in the post-protocol era) have negotiated the return of records not permitted to be taken. It may also be because the arbitrators recognize that they can quantify damages so that injunctive relief is not necessary.

What Is the Best Way to Calculate Damages?
One of the reasons cases fail to settle is that one or both parties are estimating damages on some basis that has pttle support in law or economics. For example, when a “victim” firm throws out “three times the trailing twelve” as their damages marker, or when the suggestion is made that the damages are whatever the “raiding” firm paid to the brokers in up-front money, such positions reflect a naive and perhaps all too casual approach to the case. There is a better way to calculate damages, and it is the subject of an excellent article: Finnerty, McAlpster & Chakraborty, “Calculating Damages in Broker Raiding Cases,” 11 Stan. J. L. Bus. & Fin. 261 (Spring 2006). The article was written by three individuals: an experienced attorney, an economist, and an expert witness. The article takes its support from legal precedent and from economic and accounting principles. In large part, it focuses on lost profit analysis, but it also covers consequential damages. It is sufficiently authoritative that any expert witness who deviates materially from the methodologies set forth in the article would be subject to rigorous cross-examination. 

To show up at a mediation with an expert report in hand that calculates damages consistently with the Stanford University article shows that the party is serious about the case, particularly about proving damages. Moreover, if both sides have done the same exercise, the argument will be about the validity of assumptions, which is much easier to negotiate than competing methodologies. 

How Do We Address Some of the Unique Challenges Presented by Raiding Cases?
In addition to the three areas discussed above (accurately assessing the merits of the case, understanding how arbitration panels have ruled in the past, and properly estimating damages), “raiding” cases have some relatively unique characteristics that present barriers to settlement.

First, unlike customer cases, raiding cases often involve claims for injunctive relief, whether in the form of the return of trade secret or confidential information, non-solicitation repef, or “hands off” injunctive relief. These can be highly sensitive issues, and they can greatly complicate the settlement narrative.  

Second, the claimant’s motive for prosecuting the case may have more to do with nonfinancial reasons than with economic recovery, at least at the start of the case. Especially where there are corporate changes going on (such as the sale of the business or changes to the pay structure), the principal motive may be to slow down attrition by making it more expensive for competitors to take advantage of the situation and more painful for the brokers to jump ship. As time wears on and things settle down, the claimant can then view the case as a vehicle for compensation.  

Third, the “raiding” firm has already laid out a significant amount of money, in the form of up-front money to the producers, and is more reluctant psychologically to pay even more money to the “victim” firm. As the case gets closer to hearing, however, this “double payment” issue becomes less of a barrier to settlement, partly because of the prospect of accelerating litigation expense and partly because the possibility of a damages award becomes more immediate and real. 

Fourth, there is sometimes a natural defensiveness on the part of the “victim” firm if the case involves corporate changes. The “victim” firm is often unable or unwilling to own up to the fact that when one reduces broker pay, for example, brokers are going to look elsewhere to see if they can replace the lost income.  

Fifth, raiding cases often involve regional managers and maybe even national sales management in the actual hiring, and yet these are sometimes the very people who show up at the mediation with the authority to settle. To have a regional manager whose own conduct is being called into question is a recipe for disaster, yet it happens time after time. 

With these issues heaped on the first three areas discussed above, one wonders how raiding cases ever get settled. They do—quite often, in fact. But to maximize the likelihood of settlement, one must deal with these five “unique” issues (and perhaps others). Counsel handling these cases should give consideration to the following: 

1. Attempt to eliminate injunctive issues by making a separate agreement that both sides can tolerate.

2. If the case involves corporate changes, don’t try to settle too soon. Wait until attrition dies down a bit before trying to settle.

3. When dealing with a client who doesn’t want to “pay twice,” remind him or her that the up-front money will be paid back by the brokers’ production and that the issue of whether the “raiding” firm has to compensate the “victim” firm has nothing to do with the fact that the “raiding” firm is already out some money. In fact, the more money the “raiding” firm has paid to the brokers, the more predatory its conduct appears. 

4. If confronted with a “victim” firm that can’t own up to its own issues, remind the firm that it doesn’t really matter why the brokers left—it’s about how they left. But experienced counsel will also educate the client about the “lifeboat defense” (i.e., that the brokers were going to “jump ship” anyway and the “raiding” firm was just the “lifeboat” they chose) and suggest the possibility that arbitrators may be accepting of that defense if the facts allow. At the 2003 Saul Ewing conference, 70 percent of the attendees agreed that under certain conditions, the lifeboat defense was legitimate. 

5. Eliminate decision makers with a personal stake in the case. In-house counsel should arrange for someone other than an involved regional manager to make the decisions, and that person should be available by phone “after hours” in case the mediation goes longer than anticipated.

To maximize the possibility of settling a raiding case, whether by direct negotiations or through mediation, it is critical to address the four areas covered in this article: likelihood of success, historical awards, proper damages methodologies, and issues unique to raiding cases. Raiding cases call for strong counseling skills because the corporate parties need to be educated by counsel on all of the areas covered in this article in order to make smart decisions in the negotiation process. The hope is that the information and suggestions in this article will make counsel more successful in negotiating acceptable settlements with their clients.