WealthManagement.com (April 10, 2024) - By Patrick Donachie

Nine former advisors are suing United Capital over its attempts to move arbitration proceedings from FINRA to another venue, accusing the firm of “pure gamesmanship” and “forum shopping.”

A group of former United Capital advisors is taking their former employer to court for its attempt to move ongoing arbitration proceedings against those advisors out of FINRA, arguing the “very essence of arbitration” could be compromised.

In the complaint filed in New York State Court, the nine advisors in the case take Goldman Sachs to task for its hurried sale of United Capital last year, arguing the decision to unload the firm after only four years left advisors in an untenable position.

“This frantic announcement, given in the context of four tumultuous years of Goldman’s mismanagement of United Capital, gave rise to a miasmic cloud of uncertainty and unanswered questions that choked (the advisors’) ability to advise their clients,” the suit read.

Nine former advisors brought the suit, including Michael Scott Duncan, Dwayne Grady, Caroline Girgis, Alan McClain and Amanda Pilkerton. All were advisors with the Ayco Company and United Capital under Goldman Sachs Personal Financial Management.

The advisors live and work throughout the country, including several in Maryland and Texas, as well as Virginia, North Carolina, South Carolina and North Dakota, according to the suit and records with FINRA and the SEC.

In 2020, Goldman Sachs purchased United Capital for $750 million in cash to boost its presence in the retail space, rebranding it as Goldman Sachs Personal Financial Management. But by 2023, the bloom was off the rose; Goldman Sachs put out feelers for a buyer last August. 

WealthManagement.com previously reported that the independently-minded advisors at United Capital never found a home at Goldman Sachs. Cary Carbonaro, a former top advisor at United Capital, left in May 2022 and said the wirehouse “killed the firm,” alleging Goldman Sachs put so many restrictions around advisors that they could not function.

The nine advisors in the suit against United Capital were equally unsparing, saying they left Goldman after the wirehouse “announced it was scrambling” to find a buyer for United Capital (Creative Planning purchased United Capital from Goldman last August). 

According to the complaint, Goldman’s stewardship of United Capital was “rife with problems” before the sale. The advisors said Goldman failed to hire support staff to replace individuals who left and that the wirehouse implemented suitability analyses “misaligned” with advisors’ clients. According to the suit, Goldman also improperly withheld or changed advisor compensation.

The advisors claimed that after the sale, there was “a well-publicized parade of advisors and their clients” out the door, including the advisors acting as plaintiffs in the complaint. All nine petitioners in the suit ended up at the same firm, Prime Capital Investment Advisors. 

After the advisors left Goldman, the firm (and Mercer Advisors, who’d previously employed some of the reps) filed termination statements against several former reps. 

Eventually, the back-and-forth between the advisors and United Capital, Goldman and Mercer wound up in FINRA arbitration. 

Goldman and United Capital first sued the advisors in FINRA for allegedly violating restrictive covenants by going to work for Prime Capital after leaving Goldman. The advisors fired back with their counterclaims, claiming the restrictive covenants were “unenforceable” and that Goldman and Mercer had made “false and defamatory statements” on some of the advisors’ Forms U5 in describing their resignations. 

However, the advisors’ lawsuit centers on United Capital’s attempt to move its arbitration battle with the reps out of FINRA and under the auspices of the American Arbitration Association (AAA), another arbitration forum.

United Capital claimed the move was necessary because the firm is not a member of FINRA. Still, the plaintiffs argued United Capital had already previously submitted (and withdrawn) claims against the advisors via FINRA arbitration, indicating they could arbitrate within that system. Only after withdrawing those claims did United Capital opt for the AAA, which the advisors called an example of “capricious forum shopping.” 

Indeed, the group of plaintiffs argued that FINRA was the only forum “capable of arbitrating all of the claims” asserted by Goldman and United Capital, as well as the advisors’ counterclaims and that they’d had previous agreements with the former firms mandating that any claims be argued in FINRA arbitration. 

To split them could leave the advisors litigating the same issues in two venues “with the possibility of inconsistent rulings and procedures,” according to the suit.

“So it is pure gamesmanship—or a divide-and-conquer strategy United Capital hatched with Goldman—to try to force Petitioners to litigate their claims against United Capital in another forum, but that gamesmanship would deprive Petitioners of effectively litigating their claims,” the suit read.

Goldman Sachs did not respond to requests for comment, nor did attorneys representing Duncan and the other advisors. United Capital did not respond as of press time.

But if United Capital can arbitrate in FINRA proceedings, why would the firm want to move its claims against the former advisors out of that venue?

AAA arbitration can be costly in comparison with FINRA proceedings, which can make it difficult for cash-strapped plaintiffs to prosecute their claims, according to Joe Peiffer, a founding partner with the New Orleans-based law firm Peiffer Wolf Carr Kane Conway & Wise and current president of the Public Investors Advocate Bar Association (PIABA).

Peiffer agreed with the advisors that splitting the cases would burden them more, as they have to take the time, energy and money to fight to stay out of AAA. If they lose, it can be expensive to arbitrate within AAA compared with FINRA, and they’d have to litigate their claims twice (in AAA and FINRA proceedings) with the same basic facts, according to Peiffer.

“This does double duty for the defendants,” Peiffer said. “It flies in the face of judicial expediency.”

The Prime Capital advisors aren’t the only cadre of former United Capital reps trying to keep the firm in FINRA arbitration. 

The same week Duncan and the Prime Capital advisors filed their suit, Robert Davenport and eight others sued United Capital in New York State Court. Like the Prime Capital group, these advisors want the state court to stop United Capital from trying to move its ongoing arbitration claims against their former reps to the AAA and keep them with FINRA. 

Like the other case, Davenport and the other petitioners claim they had an agreement with their former firm that claims would be arbitrated before FINRA. The advisors argued that United Capital initially entered FINRA arbitration, only to withdraw their claims and pursue them in AAA.

“Notwithstanding the clear language of the Agreements, (United Capital) has taken the opportunistic position that its claims are not arbitrable before FINRA because it refuses to agree to arbitrate under the FINRA rules and procedures,” the petition read.

Both cases are ongoing.