Frederick O'Meally, a former senior vice president and top-producing broker with Prudential Securities and then Wachovia Securities after the firms merged their retail brokerage divisions in 2003, has won a $3.8 million NASD arbitration award for having been fired for allowing market timing. The amount is based on a deferred compensation plan and a $1.3 million bonus.
According to O'Meally's formal NASD complaint filed on April 11, 2005, O'Meally was one of two top producers, earning roughly $5 million a year in commissions and fees for the firm, 45% of which he personally received as compensation.
But O'Meally was fired from Wachovia on Sept. 29, 2003, shortly after New York Attorney General Eliot Spitzer began investigating instances of mutual fund market timing and late trading. Wachovia, which O'Meally contends knew about and condoned his oversight of frequent market-timing trades for clients, changed its internal policies because of the Spitzer investigation. O'Meally is now the managing member of Kismet Capital.
"On Sept. 8, as a result of the public scrutiny of market timing, Wachovia Securities reversed its longstanding institutional support for and approval of market timing, and instituted a new firm-wide policy banning market timing," said O'Meally's complaint. "Shortly thereafter, O'Meally was terminated."
Although O'Meally was awarded $3.8 million by an NASD panel of arbitrators last week, they denied his request to have his Form U-5 amended by Wachovia to indicate that he was not terminated "for cause." An unfavorable U-5 is a black mark against a broker and often makes it difficult to obtain future employment. Whether or not O'Meally was terminated "for cause" was an issue in determining how he would be compensated.
Because the panel declined to agree that O'Meally had been wrongfully terminated, they denied him $1.5 million in wages he would have earned as a financial adviser at another securities firm. The panel also denied O'Meally's application for libel, slander and punitive damages.
Attorneys for O'Meally argued that the broker had been fired because once Spitzer began charging companies for market timing, Wachovia chose to cease that business practice, not because O'Meally had broken the firm's rules. They noted the stated reason for termination, as shown on O'Meally's Form U-5, was for "business practices inconsistent with management philosophy."
However, the attorneys argued, that self-declared inconsistency does not equate to being fired "for cause" and, in fact, high-ranking officials and legal counsel at the company were fully aware of and approved of his execution of market-timing trades. In fact, the attorneys argued, "Senior management at Prudential Securities made assurances to O'Meally that, post-merger, he could continue his market-timing business at the newly merged company."
"Fred has, for three years, been a standup guy who has been under enormous pressure" and has continued to feel strongly that he was grossly mistreated, said one of O'Meally's attorneys, Peter Fleming, Jr., who is with the New York law firm Mallet-Prevost Colt & Mosle. O'Meally feels as if he was thrown under the bus because Wachovia changed its tune, Fleming added.
"We stand by our decision to terminate Mr. O'Meally's employment and we are gratified that the arbitration panel denied Mr. O'Meally's claims for wrongful termination and defamation," said a Wachovia spokesman. "However, we disagree with the [NASD] panel's decision to award to Mr. O'Meally benefits not due to an associate who was dismissed for cause. We are considering our options with regard to an appeal," the spokesman added.
The NASD arbitration process is often preferable to a long, drawn-out court battle because it takes a fraction of the time and allows the plaintiff to tell their whole story, said Neil Hennessy, president of Hennessy Advisors of Novato, Calif. Hennessy is a former NASD committee member who has heard and decided cases involving brokers, and he has served as an expert witness in more than 500 securities cases.
"It's a simple, effective way to tell your story to a panel and get a businessman's judgment," Hennessy noted. In some cases, however, the panel will find acts so egregious that it refers the case to the NASD for a disciplinary procedure. What is more, the arbitrator's determination doesn't prevent others from filing suit.
That's true in this case. In late August, the Securities and Exchange Commission accused O'Meally and three other former Prudential brokers of executing hundreds of market-timing trades on behalf of several hedge fund clients over at least three years. O'Meally, the SEC charged, used a staff to execute voluminous mutual fund trades in a day, in many cases staying under mutual fund companies' radar by assigning multiple account numbers and representative numbers to accounts for the same client, breaking up large trades into smaller ones to avoid detection, and ignoring repeated requests by 20 or more fund firms to cease market timing in their funds.
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