NJ Court Hears Challenge to Smith Barney Company Stock Forfeiture Policy

New Jersey Supreme Court justices are considering whether a Smith Barney company stock policy in which brokers who leave the firm before two years forfeit their rights to company stock runs afoul of the public policy interest underlying the state’s wage-and-hour law.

The case, in which the Garden State’s high court heard oral arguments earlier this week, involves two former brokers, Melvin Rosen and James Fox, who challenged the Smith Barney company stock share forfeiture policy, the New Jersey Law Journal reported.

The disputed policy, instituted in 1989 to combat stockbroker turnover, allowed brokers to have part of their compensation diverted to purchase restricted shares of stock in Smith Barney’s parent company, Citigroup Inc., at 25% below market price. Employees could not sell the shares during a two-year vesting period (they could receive dividends and vote their shares), and anyone who left Smith Barney or was fired lost their interest in the unvested stock.

A trial judge ruled for Rosen and Fox finding the forfeiture of earned wages invested in the plan “contradicts public policy, which requires that employees receive their earned compensation,” the Law Journal said. A divided Appellate Division last year reversed, finding the plan had passed muster in other states and did not offend New Jersey’s Wage and Hour Law, because the contract is in writing, all terms are fully disclosed prior to enrollment, participation is optional, risk of forfeiture is disclosed unambiguously, and the plan investment provides immediate beneficial tax treatment and stock ownership benefits, the news report said.

During the Supreme Court oral argument, plaintiffs’ lawyer Bruce Nagel said Smith Barney’s plan violates the spirit and purpose of the statute, which is to guarantee that employees receive the fruits of their labor. “Earnings are sacrosanct,” he said in the news report. “A risk of forfeiture is not something that should be tied to continued employment. Smith Barney has required its employees to earn their money twice. To get what they invested in, they must perform another two years of service.”

Nagel said that departing Smith Barney employees forfeited $102 million in 2000 and $100 million in 2001.

Smith Barney lawyer Robert Del Tufo argued that the New Jersey court should follow the lead of 15 other courts around the country that have already upheld the plan. Smith Barney workers have received 144,000 shares of Citigroup stock since inception, he said.

The Appellate Division decision is here.