Academic journal article
By Finnerty, John D.; McAllister, Michael J.; Chakraborty, Maureen M.
Stanford Journal of Law, Business & Finance , Vol. 11, No. 2
When a securities broker or dealer "raids" another firm's branch office or trading desk, it improperly hires away a significant number of the raided firm's producers. This act deprives the raided firm of the producers' services and the profits it could reasonably expect to earn during the time period the producers would remain in its employ but for the raid. The raided firm may file a statement of claim with the National Association of Securities Dealers ("NASD") against the raiding firm. When a raiding case proceeds to arbitration, the amount of lost profits is a critical issue considered by the arbitration panel. A lost profits analysis calculates the amount of profits the Claimant (or raided firm) lost that is directly attributable to the raid. This represents the amount of the cash payment the Respondent (or raiding firm) needs to make to restore the Claimant to the same economic position it would occupy but for the raid.
Unfortunately, in the securities industry, arbitration panels are not required to, and do not, articulate the reasoning behind a finding of liability or how the damage award was determined. As a result, the damage awards made by securities industry arbitration panels differ widely within the industry-worse, there is an apparent lack of correlation between arbitration damage awards and the actual damages incurred by Claimant firms in any particular case.1 This inconsistency suggests that Claimants are not always properly compensated. And because these cases are decided exclusively in arbitration, rather than litigated in the courts, there is no body of published case law to which arbitrators, advocates, and parties can turn in order to consult benchmark damage awards in similar cases.2
We believe that flawed or biased damage calculations are often responsible for the inconsistent arbitration awards in broker raiding cases.3 The securities industry's arbitration process seems particularly susceptible to "speculative possibilities imaginatively shaped"4 by the wizards of Wall Street. Making matters even worse, securities arbitrators may lack the commercial background or financial training to assess the expert damages analyses and testimony derived from such speculative possibilities, which usually combine the jargon of the Street with the sophisticated application of economic and financial theory to accounting statement data. Consequently, the arbitrators' damage awards may bear no direct relation to the actual damages suffered.
The purpose of this article is to bring consistency and rationality to the award of damages in "raiding" cases. We provide a resource for arbitrators, practitioners, and other parties that brings together the legal principles applied during arbitrations, the fact patterns specific to broker raiding cases, and a recommended framework for determining the proper amount of lost profits damages suffered by a Claimant broker or dealer as a result of a competitor firm's raid. The article will thus assist the parties in presenting to an arbitration panel a lost profits damage analysis that is grounded in the fundamental principles of economics and finance, appropriately based on the books and records of the Claimant, and consistent with the teachings of relevant case law.
The remainder of this article is organized as follows: Part I discusses a working definition of "raiding." There is not a consistent consensus among the legal community as to what constitutes raiding. This Part discusses the current legal thought on this issue, including areas of general agreement and disagreement as to what constitutes a raid. The definition of a raid has a direct bearing on the evaluation and calculation of damages in a raiding case. In Part II, we present a theoretical framework for calculating damages in a raiding case that is consistent with fundamental principles of economics and finance, yet specific to the legal claims that arise in the context of a raiding claim. …