In the old days, way back in 1992,
brokers saw it as a big plus to be able to purchase stock in their parent company, then called
Last Friday, though, three former
Salomon Smith Barney
stockbrokers in New Jersey filed a lawsuit to reclaim compensation left in the company's stock purchase plan, the third set of such claims brought against the firm, now a
In the suit, which seeks class-action status from
New Jersey Superior Court
in Essex, the former brokers argue that they shouldn't have to forfeit money used to purchase the company's stock because it was originally compensation.
A Salomon Smith Barney spokeswoman declined to comment on the suit, saying the firm wasn't aware it had been filed.
Similar actions have been filed in New York and California, where a
Los Angeles Superior Court
judge ruled that Salomon Smith Barney's program, called the CAP plan, violates California labor laws. The firm is appealing.
While class-action suits against brokerage firms are a dime a dozen, the three related to Salomon Smith Barney cut to the heart of a policy that in the past enriched brokers while keeping them financially bound to the firm. Successful stockbrokers -- producers, in industry parlance -- are in as high demand as ever and stock purchase plans with vesting periods often serve to keep them from joining another firm.
With every full-service brokerage firm eagerly recruiting brokers to reap the recurring asset management fees, it would be no small development if brokers were able to simply walk away from their employers. A plaintiff's victory could help competitors chip away at Salomon Smith Barney's 12,000-broker sales force, says Mark Elzweig, a New York recruiter. "I think brokers who want to leave won't be worried anymore about leaving something behind," Elzweig says.
Essentially, the firm maintains a program in which employees, including brokers, can use a pretax portion of their compensation to purchase stock at a discount. The program includes a two-year vesting period, meaning that brokers don't get all their stock until the end of that period. If a broker leaves, Salomon keeps the stock that hasn't vested, which means that it also keeps the money used to purchase the stock.
"The CAP plan involves money earned strictly based on an annual salary," says Donna Chin, of
Nagel Rice & Dreifuss
, the Livingston, N.J., firm that filed the case on behalf of Melvin Rosen, Richard Siracusa and James Fox, who worked at the firm's New Jersey branches. The attorneys think the class may number in the thousands, via brokers who have left the firm, and may seek damages in the hundreds of millions, Chin says.
Chin says the firm profited from the funds left behind by retaining the shares. In addition, many brokers who left were high earners who had amassed large amounts in the CAP plan, the attorney says. While the brokers may have been compensated by their new firms for the loss, Smith Barney got to keep the stock position.
The suit also alleges that Solly induced employees to join the CAP plan by stressing that it was a prerequisite for promotion and continued employment, that it showed loyalty to the company and that it was considered when prospect lists and office benefits were allocated within sales offices. The CAP plan contribution took on the form of an "illegal cash bond" between Solly and its brokers, the suit contends.