Top management at H&R Block Inc., parent of H&R Block Financial Advisors Inc., allegedly turned up the heat and threatened a senior executive in the middle of an acrimonious dispute over compensation, according to an arbitration complaint that led to a $4 million award to the executive last month.
The threats, against Thomas Fitzgerald, former chief operating officer of H&R Block Financial Advisors, included a warning that company executives would pin the blame on him for any regulatory problems the firm saw on his watch, according to the complaint.
At the time of the dispute, in February 2004, NASD of New York and Washington, now the Financial Industry Regulatory Authority Inc., told H&R Block Financial Advisors that it planned to charge the firm with "mutual fund market-timing activity," according to the complaint.
Brian Nygaard, at the time the broker-dealer's chief executive and president, "telephoned Fitzgerald and stated that he was concerned that [former H&R Block chairman and chief executive Mark Ernst] would blame [the broker-dealer's] market-timing problem on Fitzgerald, and again encouraged Fitzgerald to resign and accept a severance from the firm," according to the complaint.
Mr. Fitzgerald told Mr. Nygaard he was not responsible for the problem, and the latter "acknowledged" that, according to the complaint.
"Fitzgerald told Nygaard that in light of the threats that Ernst would blame him for any regulatory problems, he was uncomfortable resigning under circumstances where there would be a cloud over his head," the complaint said.
In April 2004, H&R Block Financial Advisors fired Mr. Fitzgerald.
That came four days before the end of the firm's fiscal year and was therefore "a deliberate attempt" on the part of the firm to deprive him of short-term compensation for that year, according to the complaint.
Mr. Fitzgerald's claim centers on a series of three grants of company stock options, the first two of which he received.
According to the complaint, the company in 2001 awarded Mr. Fitzgerald — but refused to issue him — 30,000 split-adjusted shares of H&R Block common stock at a price of $32.275 a share.
He alleged that he was denied the stock options and severance required under his contract because he would not agree to a two-year non-compete restriction, his representative law firm, Page Perry LLC of Atlanta, said in a statement.
"Restrictive covenants" such as non-compete clauses often prove to be hot-button issues in arbitration claims, one attorney said.
"In this particular case, the question wasn't the ability to enforce a non-compete but the attempt to extract a non-compete," said Andrew Oringer, a partner with White & Case LLP of New York. "That's like pouring kerosene on a fire."
On Feb. 20, a Finra arbitration panel awarded Mr. Fitzgerald $3.01 million in compensatory damages, $466,565 in interest and $481,910 in legal fees.
H&R Block is based in Kansas City, Mo., and its brokerage firm is based in Detroit. Both were named in the complaint.
H&R Block does "not comment, as a matter of policy, on matters regarding former associates," Beth Strauss, a company spokeswoman wrote in an e-mail.
Mr. Nygaard left the broker-dealer in 2005, and Mr. Ernst re-signed as chairman and CEO of the parent company last year. According to the statement by Mr. Fitzgerald's attorneys, both testified during the hearing of the arbitration, which Mr. Fitzgerald filed in 2005.
Olde Discount Corp. hired Mr. Fitzgerald as general counsel in 1995. H&R Block acquired Olde in 1999 for $850 million, and changed its name to H&R Block Financial Advisors a year later.
At that time, Mr. Ernst, then chief operating officer of the parent company, was quick to praise management of Olde, according to the complaint. In an August 1999 meeting with Olde executives, he "commended" management about how well and profitably it had run the firm, and spoke optimistically about the future.
Mr. Fitzgerald and other executives received their compensation packages at that time.
Over time, Mr. Ernst's assessment of Mr. Fitzgerald soured, according to the complaint. In 2003, Mr. Fitzgerald complained to Mr. Nygaard that the firm was not meeting the terms of his stock option and employment agreement, according to the complaint.
Mr. Nygaard then turned to Mr. Ernst. "In the course of these back-and-forth discussions, Nygaard revealed that Ernst's perception of Fitzgerald was influenced by 'part of the taint of being here through the acquisition,'" according to the complaint.
Mr. Fitzgerald and the compliance department were viewed as "the 'business prevention department' due to his and their focus on regulatory and compliance issues affecting the business," the complaint stated.
"Nygaard summed it up by saying: 'There is CEO despair going on,'" the complaint stated.
E-mail Bruce Kelly at bkelly@investment news.com.