Wells Fargo to pay $79M over advisor comp lawsuit

 From the Desk of Jim Eccleston at Eccleston Law LLC:

Wells Fargo doesn't expect any disruption to its advisor compensation program following a major class-action settlement led by a former advisor who sued to recover deferred compensation that he said the firm improperly withheld from him when he left to launch his own practice.

Officially, the company indicated that it settled the case reluctantly, agreeing to pay out $79 million to put an end to the matter. But Wells Fargo insisted that it did nothing wrong in claiming the deferred compensation that outgoing advisors felt they were owed.

"While Wells Fargo has consistently denied the allegations in this class action lawsuit involving former financial advisors, we also believe that resolving this matter is in the best interest of the company," the bank says in a statement.

But a company source indicates that the firm's approach to compensation will remain largely unchanged, and that, going forward, most advisors' deferral plans will simply move to a different in-house account on the back-end — what the source described as a "technical" change.

"Nothing changes for the advisor," the source says.

That means that advisors at Wells Fargo will continue to engage with the same deferred compensation program, the same vesting schedule and the same forfeiture provisions that were at the center of the class-action case.

The settlement ends a three-year long dispute that started when advisor Robert Berry sued Wells Fargo in February 2017 to recover money he said was owed to him under the company's deferred-compensation plan, and which the firm improperly forfeited, according to Berry's complaint.

He alleged that Wells Fargo had violated the provisions of the Employee Retirement Income Security Act (ERISA), which imposes vesting and non-forfeitability requirements on pension benefit plans — provisions that Berry argued applied to Wells Fargo's deferred-compensation plan.

Berry, who began his career in financial service in 1984 at Dean Witter, came to Wells Fargo after it acquired Wachovia Securities in 2008, according to his complaint. In February 2014, he left Wells Fargo to launch his own firm, Berry Financial Group, an LPL affiliate in Lexington, South Carolina.

He acknowledged that his agreement with Wells Fargo contained a forfeiture clause that authorized the firm to reclaim deferred compensation from employees who went to another financial services firm within three years of leaving the wirehouse, but contended that that provision was rendered moot by the federal statute.

"[B]ecause the forfeiture clause is unenforceable under ERISA, plaintiff is entitled to his deferred compensation that was forfeited," Berry argued in his initial complaint.

In its response to the initial complaint, Wells Fargo countered flatly — and repeatedly — that its compensation plan is not covered by ERISA.

Berry and his attorneys did not immediately respond to requests for comment.

The two sides engaged in "extensive arm's-length negotiations" with the aid of veteran ERISA mediator Hunter Hughes III, according to the plaintiff's filing in support of the settlement.
Of the $79 million, the settlement stipulates that up to 30% can be used to cover attorneys' fees.

As for the legal question, Berry argued that it's an employee benefit plan — both a pension benefit plan and an individual account pension plan under ERISA — and that Wells Fargo failed to meet the vesting, non-forfeitability and funding standards under federal law.

He further argued that the plan could not meet the definition of a so-called "top hat" plan, a special exempted classification under ERISA that applies to plans with the primary "purpose of providing deferred compensation for a select group of management or highly compensated employees."

The settlement, which now awaits final approval in federal court, would apply to advisors who participated in Wells Fargo's deferred-compensation plan from February 2011 through January 2020.

Jim Eccleston, lead attorney at Eccleston Law in Chicago, suggests that the settlement could also face a legal challenge for the "unusual" non-opt-out provision of the settlement that would preempt other advisors from pursing their own litigation against Wells Fargo.

"Most class action settlements allow members of the class to opt out of any such settlement agreement and pursue their own claims for recovery with their own counsel. Not here," he says.

"While this action sought to right the wrongs of the 'golden handcuffs' associated with deferred compensation vesting and forfeiture provisions, ironically the same 'golden handcuffs' are present in this fully binding class action settlement agreement," Eccleston says.

Still, the draft settlement notice that eligible advisors would receive notes that the Wells Fargo business entities named as defendants in the settlement "deny all allegations in the class action."

So why settle? Wells Fargo would not comment beyond its statement, but compensation expert Andy Tasnady says that it could be looking to move past the controversies that have been swirling around the firm for the last few years.

"I would think the Wells decision to settle this case might be in large part related to management trying to reduce the number of legal and bad press related issues that they are involved in from their consumer bank issues over the last few years," he says.

Eccleston argues that the $79 million settlement figure — to be distributed among as many as 1,400 advisors, less legal fees — is a good deal for Wells Fargo and a poor one for advisors.

"Already we have received inquiries by concerned advisors who lost millions in the deferred compensation forfeiture, and believe that this deal is far from adequate," Eccleston says.

"Moving forward," he adds, "deferred compensation always will test the limits of the law in seeking to create disincentives to advisors who may be considering transitioning to another firm."

The attorneys of Eccleston Law LLC represent investors and advisors nationwide in securities and employment matters. The securities lawyers at Eccleston Law also practice a variety of other areas of practice for financial investors and advisors including Securities Fraud, Compliance Protection, Breach of Fiduciary Duty, FINRA Matters, and much more. Our attorneys draw on a combined experience of nearly 65 years in delivering the highest quality legal services. If you are in need of legal services, contact us to schedule a one-on-one consultation today.

Related Attorneys: James J. Eccleston

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