Critical Journal Entries
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Written evidence usually wins out in arbitrations, but brokers typically don't document well. Here's how to keep notes that will carry weight.
Arbitrations are frequently "he said, she said" affairs - whether between reps and customers or reps and former employers. And arbitrators hate cases with two diametrically opposed stories, since someone isn't telling the truth.
As an arbitrator and as an advocate, I have found that the winner will be the person who can elevate the fight from words to documents. Arbitrators love documents - activity letters, client statements and memos from management - anything to make a case seem more objective than subjective.
Here are some suggestions that may lead to arbitration success. One is from the rep-versus-firm arena and the other involves a customer against a rep.
I have been involved in many rep-versus-firm cases involving discrimination, wrongful termination, recruitment and forgivable loans. The one thing that always hits me is how poorly the broker documents the case. In a promissory note case, for example, the firm will have the note as evidence, and the broker will often have nothing.
For heaven's sake, take notes when you enter the agreement. Your loan balance will likely be very large in the beginning. And although you may think of it as a bonus, in reality, it is a liability that decreases over time.
If your manager makes statements regarding your employment or the repayment terms of the note, write them down. Sign them and get your boss to sign them as well. Then, stick the memo into the time-stamp machine and make sure each of you gets a copy. That way there can be no doubt about what the deal was.
Even if a panel doesn't find the document exactly legally binding, it will be powerful evidence of the parties' understanding. Too often reps are wrongly afraid to create such a memo. But if it is a truthful and accurate representation of conversations with your boss, then you both should feel comfortable signing. A word of caution - don't overreach. An arbitration panel will rule against you if it feels you are stretching the truth. You will be limited to what is in the memo.
Similarly, in a case against a customer, daily journals often become relevant. (I like simple, spiral-bound notebooks, but some people like to use electronic systems now.) Simply put, if your gut tells you that something could be a problem in the future, write it down. Journals are the place to record if a client places an unsolicited trade or does something against your advice. I am a strong advocate of journals because I have seen them win cases, with caveats.
First, use them for all of your clients. If you have a notebook only on a troublesome client, the arbitrators will wonder why you ever kept the guy or will suspect you created the journal after the fact. But entries about a client embedded in a clearly busy journal make it almost impossible to question their legitimacy.
If the journal entry helps you, the client's attorney will attack its authenticity. This doesn't mean every client needs to come up regularly in your journal, and clearly they won't. It is OK that some clients appear more often. It's just troublesome when one client has his or her own notebook.
Again, feel free to use the time stamp to lend credence to the entry. That is another reason why I prefer handwritten entries.
One final thing - keep your old journals. The NASD allows arbitrations for up to six years following a given transaction. Hold onto your notes for at least that long.
Timothy Schannep, a U.S. Bancorp Piper Jaffray broker in Tucson, Ariz., says he, too, has noticed that investors chase hot funds but hang on to dogs.
On the buy side, "People feel they're missing out by not owning the hot fund," he says. Yet they forget about opportunity cost while sticking with an underperformer.
Adds Schannep's partner, Gregory Bryson, "People have a natural tendency to not want to admit mistakes."
But Tom Coxhead, a Dain Rauscher broker in Denver, says he hasn't noticed the sell-winners, hold-losers mentality as much in fund investors as in stock buyers. His explanation: Fund investors are more patient because they typically don't have a lot of time or inclination to keep an active eye on their portfolios.
