Rubenstein v. Advanced Equities, Inc.

• Decision Date: 31 March 2014
• Docket Number: 13 Civ. 1502 (PGG)
• Parties: ERIC RUBENSTEIN, AARON SEGAL, SCOTT CARDONE, and DAVID LANDSKOWSKY, Plaintiffs/Petitioners, v. ADVANCED EQUITIES, INC., BYRON CROWE, DWIGHT BADGER, and KEITH DAUBENSPECK, Defendants/Respondents.
• Court: U.S. District Court — Southern District of New York

ERIC RUBENSTEIN, AARON SEGAL, SCOTT CARDONE,and DAVID LANDSKOWSKY, Plaintiffs/Petitioners, v. ADVANCED EQUITIES, INC., BYRON CROWE, DWIGHT BADGER,and KEITH DAUBENSPECK, Defendants/Respondents.

13 Civ. 1502 (PGG)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

DATED: MARCH 31, 2014

MEMORANDUMOPINION & ORDER

PAUL G. GARDEPHE, U.S.D.J.:

Petitioners Eric Rubenstein, Aaron Segal, Scott Cardone, and David Landskowsky are former employees of Respondent Advanced Equities, Inc. ("AEI"), a broker-dealer subject to the Financial Industry Regulatory Authority ("FINRA"). Respondents Byron Crowe, Dwight Badger, and Keith Daubenspeck are former officers and directors of Advanced Equities Financial Corporation ("AEFC"), the parent company of AEI. This parties' dispute arises from Petitioners' contracts with AEI. (Roth Aff. (Dkt. No. 1), Ex. 3) The dispute was submitted to a FINRA arbitration panel, which found in Respondents' favor. (Id., Ex. 2) Petitioners have moved for an order vacating the final arbitration award. (Petition (Dkt. No. 1)) Respondents have cross-moved for an order confirming the award. (Dkt. No. 8) For the reasons stated below, Petitioners' motion to vacate the arbitration award will be denied, and Respondents' motion to confirm the award will be granted.

BACKGROUND

I. THE CONTRACT DISPUTE

Headquartered in Chicago, AEI was a registered broker-dealer specializing in late-stage private equity financing. (Pet. Br. (Dkt. No. 1) at 4; Resp. Br. (Dkt. No. 10) at 4) In 2006, AEI opened a New York office and began recruiting brokers to join that office, including Tim Herrmann and Todd Harrigan.¹ (Pet. Br. (Dkt. No. 1) at 4; Resp. Br. (Dkt. No. 10) at 5) During the recruitment process, AEI flew Herrmann and Harrigan to Chicago to meet with AEI's President - Jeff Fisher - and Respondents Daubenspeck and Badger on several occasions. (Pet. Br. (Dkt. No. 1) at 4-5) On November 16, 2006, Herrmann and Harrigan entered into employment agreements with AEI. (Id.; Resp. Br. (Dkt. No. 10) at 5)

Herrmann and Harrigan recruited Petitioners Rubenstein, Landskowsky, and Cardone to join AEI's New York office. (Pet. Br. (Dkt. No. 1) at 6, 10; Resp. Br. (Dkt. No. 10) at 5) In January 2007, Rubenstein, Landskowsky, and Cardone began talking with Fisher about the possibility of joining AEI. (Pet. Br. (Dkt. No. 1) at 10) Rubenstein also met with Respondents Daubenspeck, Badger, and Crowe in Chicago to discuss AEI's proposed terms of employment. (Id.) On March 30, 2007, Rubenstein, Landskowsky, and Cardone entered into employment agreements with AEI and joined its New York office. (See Roth Aff. (Dkt. No. 1), Exs. 5, 6, 9)

In November 2006, Fisher recruited Petitioner Segal at a series of meetings, some of which took place at AEI's New York office. (Pet. Br. (Dkt. No. 1) at 7) On January 8, 2007, Segal entered into an employment agreement with AEI and joined its New York office. (See Roth Aff. (Dkt. No. 1), Ex. 8)

Petitioners claim that, under their contracts with AEI, they are entitled to fifty-percent of the "gross commissions" that they earned. (Pet. Br. (Dkt. No. 1) at 3) Petitioners further assert that they were led to believe - during their recruitment meetings with Respondents - that "gross commissions" meant the total revenue that they brought into AEI. (Id. at 17) Petitioners also contend that language in their employment agreements is consistent with this understanding. (Id.) The term "gross commissions" is not defined in Petitioners' employment agreements, however. (See Roth Aff. (Dkt. No. 1), Exs. 5, 6, 8, 9)

The employment agreements of Petitioners Rubenstein, Landskowsky, and Cardone include the following language as to commissions:

Commission Payout: Your Commission Payout will be the greater of the then-current minimum monthly payment for exempt employees in New York, currently $2,324 (the '"Monthly Draw") or (ii) a Commission Payout equal to the standard AEI commission payout, which is currently 50%.

Private Equity Commissions: Currently gross commissions on private equity transactions are three percent (3%) on "direct" investors (generally those investing $1,000,000 or more), and eight percent (8%) on "indirect" investors (generally those investing less than $ 1,000,000) (these gross commission rates, are subject to change on future private equity transactions in AEI's sole discretion.) Thus, by way of example, Employee would receive fifty percent (50%) of three percent (3%) or fifty percent (50%) of eight percent (8%) of the amount invested, as applicable.

(Id., Exs. 5, 6, 9)

Petitioner Segal's employment agreement contains an identical provision regarding "Private Equity Commissions," and the following language regarding commission payouts:

Commission Payout: Your Commission Payout will be the greater of the then-current minimum monthly salary for exempt employees in New York, currently $2,324 (the "'Monthly Draw") or the Monthly Commission Payout Schedule described below:

• 90% from (i) the date on which your securities licenses are transferred toAEI through (ii) the subsequent full calendar month,

• 90% in calendar month two,

• 80% in calendar month three,

• 70% in calendar month four,

• 70% in calendar month five and

• 60% in calendar month six.

After the first six (6) full calendar months of employment after your licensing, your Commission Payout shall be the then-current AEI standard commission payout, which is currently 50%.

(Id., Ex. 8)

Petitioners also claim that their employment agreements entitle them to bonuses at specified percentages if their commissions reach certain levels, and to warrant compensation and back-end interest in companies for which they raised money. (Pet. Br. (Dkt. No. 1) at 14-16)

Under their employment agreements, each Petitioner agreed to execute a promissory note, pursuant to which AEI would make a loan to Petitioners that would be forgiven over the first five years of their employment at AEI. (See Roth Aff. (Dkt. No. 1), Exs. 5, 6, 8, 9) Rubenstein, Landskowsky, and Cardone's agreements provide that

[i]n the event that (i) Advanced Equities terminates [Petitioner's] employment or registration with Advanced Equities for Cause, as defined below or (ii) [Petitioner] voluntarily terminates his employment or registration with Advanced Equities, in either case, at any time prior to full and final satisfaction of [the] Note, the then outstanding balance (both principal and interest) under [the] Note shall immediately become due and payable without notice, protest, presentment or demand and no further forgiveness shall occur.

(Id., Exs. 5, 6, 9)

Segal's agreement likewise includes a loan that would be forgiven over a five-year period. (See id., Ex. 8) Segal's promissory note states that

[n]otwithstanding anything contained herein to the contrary, in the event that [Petitioner's] employment or registration with Advanced Equities is terminated for any reason whatsoever or no reason at all, by [Petitioner] or by Advanced Equities, in any case at any time prior to the full and final satisfaction of this Note ... the then outstanding balance (both principal and interest) under this Noteshall immediately become due and payable without notice, protest, presentment, or demand and no further forgiveness shall occur.

(Elisofon Decl. (Dkt. No. 9), Ex. 38) Each employment agreement states that the accompanying promissory note's "terms [are] incorporated" in the contract. (Roth Aff. (Dkt. No. 1), Exs. 5, 6, 8, 9) The promissory notes provide that Petitioners will be liable for "any and all of the holder's costs in connection with the enforcement and collection [of unpaid amounts due], including without limitation any and all attorneys' fees." (Elisofon Decl. (Dkt. No. 9), Exs. 38-40)

Petitioners claim that Respondents did not pay them the full amount of their promised commissions, or the bonus and warrant compensation that they were entitled to receive, under their employment agreements. (Pet. Br. (Dkt. No. 1) at 3-4, 15-17) When Petitioners complained to Respondents, their complaints were allegedly "met with hostility and threats." (Id. at 18-19)

Petitioners claim that after brokers' complaints about wan-ant compensation at AEI grew, AEI brokers from various AEI offices - including Rubenstein and New York Branch Manager Frank Mazzola - attempted to form a committee to address the treatment and distribution of warrants. (Id. at 21; Elisofon Decl. (Dkt. No. 9), Ex. 1 at 295-97) However, Respondents allegedly refused to recognize the committee. (Pet. Br. (Dkt. No. 1) at 21) According to Respondents, the only warrants that Petitioners were entitled to were worthless, so they were owed no compensation. (Resp. Br. (Dkt. No. 10) at 12) Petitioners claim, however, that this explanation is misleading; they assert that AEI's promise to provide them with a percentage of warrants "earned by AEI" was a "sham" because - as they later learned - AEFC and not AEI had possession of the warrants, and that is why AEI could claim that it had no warrant-related compensation to share with Petitioners. (Pet. Br. (Dkt. No. 1) at 22)

According to Petitioners, similar claims have been made nationwide against Respondents by their former employees, including those who worked in AEI's San Francisco and Chicago offices. (Id. at 20)

Petitioners further allege, that beginning in the summer of 2007, Respondents urged Petitioners and other AEI brokers to invest their money and their client's money in what was then an unnamed energy company that Respondents claimed was developing a revolutionary new fuel cell technology. (Id. at 23-24) Respondents allegedly pitched this deal to Petitioners' clients and represented that the energy company already had $2 billion worth of sales orders from various major companies waiting to be filled. (Id. at 24) According to Petitioners, however, these representations were false, and led to an SEC investigation of AEI that resulted in a $1,000,000 fine on AEI, a $100,000 fine and a one-year bar from the...