Former NEXT Financial Group Stockbroker’s Claim that He Was Fired for Refusing to Conceal Churning is Subject to Arbitration

The Texas Supreme Court says that former NEXT Financial Group Inc. stockbroker Michael Clements’s claim that the brokerage firm fired him for refusing to cover up churning activity must be arbitrated. Clements was hired as a NEXT Financial regional supervisor in September 2006. Nearly a year later, the brokerage firm fired him because he allegedly failed to perform his required broker responsibilities related to an NASD audit.

Clements filed a lawsuit against the company, claiming he was terminated from his job because he refused to conceal the fact that a NEXT trader had violated federal securities laws by churning client accounts. NEXT pushed for arbitration, claiming that Clements had signed a Form U-4 when he was hired, which requires that he resolve any claims with the brokerage firm through arbitration-per the Federal Arbitration Act.

Clements has maintained that because his claim was based on at-will employment and wrongful termination, rather than a contract connected to a commercial transaction, his claim is exempt from the FAA’s arbitration requirement. He also asserted that his claim resulted from NEXT’s alleged illegal behavior, not its business dealings, and that a recent change in NASD code (following the National Association of Securities Dealers’s merger with the Financial Industry Regulatory Authority) indicated an intent to exclude disagreements involving employment matters from arbitration. Clements noted Sabine Pilot Services v. Hauck, (1 687 S.W.2d 733, 1985), a case where the Texas Supreme Court held that an employer had to pay an ex-employee damages because the worker was fired for refusing to perform an illegal act.

The Texas Supreme Court, however, upheld that the FAA was applicable in this case, NEXT could compel arbitration, and the NASD rule 13200 (a) did not exclude employment and termination-related claims. The court’s decision reverses the trial court’s ruling, which denied NEXT’s request, as did the court of appeals.

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