An Employment Scam in the Financial Services Industry
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Prosecution and Legislation

YET ANOTHER LEGAL DISCLAIMER: I'm no attorney. The information provided below is based on my opinions and does not constitute legal advice but may aid you in finding an attorney or getting help fighting back without the aid of one (though that isn't recommended). I take no responsibility for decisions that are yours to make, so do your own research, and good luck.

The laws right now are stacked against you. It's next to impossible to close down a firm behaving as an illegal MLM because illegal MLM-related laws are weak. Those firms will likely continue as they are for years to come. If you're going to sue, consult an attorney about your best course of action. I think it's better to make sure the case is on the books for the next potential victim who researches the firm. Complain using the appropriate channels, and make your voice heard to your legislators.

I. Prosecution. If you've already been burned, here are your recourses as I understand them:

1. Recourse #1: Mediation or Arbitration. If you signed an employment contract with a mediation or arbitration clause, be sure you understand what those terms mean. Mediation is meant to facilitate the parties simply coming to an agreement and implies no award or judgment. Arbitration implies an award (decision) and is meant to be speedy and less costly than a court hearing or trial but may limit your ability to appeal the decision. By arbitrating, you may be giving up the right to pursue the matter through the courts. While an attorney is not required, you can assume the broker/dealer will be represented, and there's a chance they've done it all before. Consider legal representation for yourself. Arbitrators are not required to write opinions or provide reasons for their decision. Request an opinion in writing before the hearing date.

More information is on FINRA's site here. Do note that judges have increasingly been leaning towards permitting disputes that cannot be resolved in arbitration/mediation to proceed to civil court, since arbitration/mediation is such an unfair route for the rep! For instance the company may cherry-pick an arbitrator "knowledgable in financial services employment disputes" who tends to decide overwhelmingly in their favor. Also, the costs to institute an arbitration case are often even more expensive than for instituting court litigation [*] — in some cases up to 5,000% higher [*] — a natural deterrent for potential claimants [*].)

If you didn't sign an employment contract with such a clause, consider #2 or #3 below.

2. Recourse #2: Small Claims. If it's $7500 or less (that's California, check your state's limit), small claims is a low-cost solution with no need of an attorney. However, you MUST file your claim properly! If you have been classified as an independent contractor and want to take the easier route, you may need to file the suit against your individual district or general manager to avoid the court's being forced to dismiss your case. If you list the firm as your employer, the firm may claim it owes you nothing since you were never its employee. The trick here appears to involve claiming that the manager is your "employer" and you're suing him for fraud, particularly if he has stolen commissions that should have gone to you. (Remember, he's an independent contractor, which lessens the firm's legal liability.) If you filed Form SS-8 with the IRS and the IRS has determined you to be an employee (though this could a year or more), haggling over your status may be diverted. If you can't wait and still want a judgment against the firm and not just the individual manager (and you should persist against the firm itself if you want other unfortunate souls to have that firm's name available in court records for future reference), you may need to prove to the judge that you were an employee. Try to utilize the criteria listed in the "Independent Contractor" section of this site and file IRS Form SS-8.

3. Recourse #3: Civil Court. For amounts that do not exceed $25,000, usually filed as a "limited jurisdiction civil case"; or for amounts over $25,000, usually filed as an "unlimited jurisdiction civil case" (figures are for California, check your state's limits). You will likely need to pay for the services of an attorney at this point, and few if any that I know of will accept your case on retainer or pro bono (free, for the public good). You will usually need to come up with a hefty sum ($15-20,000 in my state) just to get a case started, and if the firm refuses to settle, you could be in for a long and costly trial. However, your attorneys' fees can be reimbursed upon your winning your case. You'd better have good documentation for this route.

If you can afford to sue, do it, and if you suspect others have been victimized, file the suit as a class action lawsuit so your attorney can publicly solicit others similarly wronged. If other plaintiffs come forward, you can split the costs of prosecution and recover those costs if your case is won.

If you cannot afford to bear the costs of filing a class action suit alone, you're stuck soliciting others up front by yourself. This is extremely tricky -- refer to the section ahead on the anti-SLAPP law.

I'd personally like to see more former employees refuse to settle, and pursue a trial and ultimate judgment against the firm, since a judgment is more damaging because it becomes public record and may help set new precedent. Scammer firms know that few of the young, impressionable people they recruit will have the guts to sue and will likely just "chalk it up the experience," but you may feel a duty to future recruits to make sure a judgment is on record so they will have their chance to avoid your mistake.

Start here to use the American Bar Association's "Lawyer Locator."

4. Recourse #4: REGULATORY AGENCIES. If you feel you've been defrauded or scammed, complain! You may not be the only one, and you may be aiding in shutting down a scammer firm by letting your voice be heard. See the Links and Resources page for more information.

II. Legislation. Here are some of the laws I'm aware of which may be used to protect you in fighting back, but be aware that they need work.

1. Federal and State Anti-Pyramid Laws.

Many scammer firms operate similar to pyramid schemes, and pro-MLM lobbyists (most notably the Direct Sellers Association, or DSA) have tried to push legislation that purports to be anti-pyramid but really just legalizes them. For instance, The "Anti-Pyramid Promotional Scheme Act of 2003" (HR 1220 IH), sponsored by the DSA, attempted to legalize pyramid schemes nationwide. Since the federal version has repeatedly been shot down, they've resorted to trying to get states to pass versions of the same legislation. As of 2009 duped states included Texas, Montana, Louisiana, Oklahoma, New Mexico. Kentucky, Idaho [SB 1237], South Dakota [HB 1183], Georgia [SB 141], North Dakota, Maryland, Utah [SB-182] and Illinois.

HR 1220 IH defined the following characteristics. Pyramid schemes:

(A) finance returns to participants through sums taken from newly attracted participants;
(B) promise new participants large returns for their investments; and
(C) use unfair and deceptive sales tactics, and lead to the victimization of unwitting individuals.

Aside from the sleazy language that actually would have legalized pyramid schemes, I think HR 1220 had a pretty fair definition of them. If your state has passed some version of this law with the above definitions, then you might be able to make the following cases:

(A) A scammer firm finances returns to participants through sums taken from newly attracted participants. The manager's income is dependent on attracting a constant stream of new reps who will pay for "training" and whose contacts may be mined. Product sales are arguably incidental to the continued viability of the business. A rep's goal is management so he can perpetuate the scheme.
(B) A scammer firm promises new participants large returns for their investments. The target market sought by scammers consists largely of people who would otherwise stand a pretty fat chance of making the income that is represented to them. Their "investment" is their education and career track, and even a "business" if they are classified as an independent contractor.
(C) A scammer firm uses unfair and deceptive sales tactics, and leads to the victimization of unwitting individuals. The income represented by the firm is unattainable for the vast majority of participants, though promoted otherwise.

If you feel like helping others, you might check your state's law to see if current or pending legislation attempts to redefine retail customers as including participants in the scheme (personal use). If you see that characteristic, fight for its defeat or repeal.

2. The Anti-SLAPP Law.

This law needs work too.

If you have left the business broke and need to sue, you may need to seek other similarly wronged reps to pool finances towards the hiring of an attorney in a class action lawsuit. If you kept in touch with former workmates, call and ask them privately about their experiences there and see if they match yours. If you didn't keep in touch with everyone who worked with you at the firm, you can attempt to locate those people. is one place to start.

If you didn't keep in touch with everyone and can't locate them, you may be forced to publicly solicit other similarly situated individuals who can agree to pool legal resources. This is why you need to know about SLAPP/anti-SLAPP laws. SLAPP lawsuits ("Strategic Lawsuits Against Public Participation") are lawsuits instigated by a firm against critics in which it will attempt to silence possible critics by crying "libel!" or "slander!" Just posting a message to a public forum telling your story and inquiring if others have experienced the same with the firm can get you sued. The firm can cite your post as a "conspiracy" to solicit others to defame them! The truth doesn't matter; you'll be forced to legally defend yourself before you ever get your own suit mounted. (Although the Communications Decency Act has been consistently interpreted as holding operators of print media such as newspapers, websites, message boards, and the like not liable for the comments and opinions of third parties, many of those operators will simply remove your post and give up your identity rather than pay, or continue paying, to defend themselves. Your name might just replace "John Doe #1" in the SLAPP suit.) Since many victims cannot afford attorneys' fees to defend themselves, a common outcome is that they settle out of court on the "defamation" case with the agreement that they will never again speak of the firm (permanent injunction). You don't want that happening to you when your goal is to talk to others about the firm in order to mount a class action suit. Stick to soliciting information only, and discuss that information privately. Far better, of course, is finding an attorney who will initiate the case on contingency as a class action lawsuit and let him solicit others publicly.

(For an interesting case explaining how one company attempted to silence critics in an alleged "SLAPP" case, read "Free Speech and the Internet: a Fish Story" at's Article on "SLAPPs" has an interesting examination of Amway's attempts to protect its image. It supports the argument that a company need only name or continue to name critical website operators as defendants in unrelated cases to drain their finances and force closure of their sites. All cases were dismissed, but most sites closed.)

There is no guarantee that you will never be the target of a SLAPP. However, according to the California Anti-SLAPP Project's website, certain types of homeowner and business insurance may protect you if you're SLAPPed.

The Anonymous Internet Foundation, Inc. may be able to help SLAPP victims obtain legal representation, even on a pro bono (for the public good) or reduced fee basis. Update 2009: Site does not appear to be maintained but is still active.

Both laws above could protect you, but cases of this nature are still cutting edge, and the past rulings I know of have been inconsistent at best. Your case could set the first precedent in applying existing laws successfully once and for all, but new legislation altogether may ultimately be warranted. Start here to contact your local legislator about these laws and lobby for better consumer protection.

The next section, "Networking," provides information on getting in touch with others so you can avoid the scam to start with or pool resources to prosecute if you've been a victim.

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