Wedbush Securities Inc. has been ordered to pay more than $3.5 million to make up for its “morally reprehensible failure and refusal” to compensate one of its traders, an arbitration panel has ruled.

A three-member Financial Industry Regulatory Authority (FINRA) panel handed down the decision on June 23. The ruling comes after the claimant, Stephen Kelleher, first joined Wedbush in early 2007 and allegedly worked for years without receiving consistent payments of the incentive-based compensation he had been promised. Kelleher served as a municipal sales trader at Wedbush.

Wedbush’s attorney on the case, John W. Stenson, declined to comment on the FINRA panel ruling and said the firm is in the process of appealing the decision.

During Kelleher’s employment at Wedbush, which ended shortly before the arbitration decision, Wedbush withheld close to $5 million, according to estimates from Kit Knudsen, partner at Commins & Knudsen PC, the San Francisco law firm representing Kelleher in the case.

While Kelleher continued to receive a base salary, the incentive-based compensation, which makes up most of what traders take home, was unevenly distributed in three payments in May 2008, October 2009 and April 2010. After repeated attempts to ask the firm for the remaining compensation he was owed, Kelleher felt there was no other way than to turn to arbitration, according to Knudsen.

“It was a last resort for him. He had never had to bring a claim like this in the past,” Knudsen said. “He was very much a team player and inclined to believe that it would work out.”

Kelleher filed his first claim against his employer Wedbush in April 2010. In that claim, he alleged breach of contract, violation and failure to pay in accordance with labor laws, fraud and unfair business practices. At the close of the hearing, Kelleher requested more than $6.1 million, including $4.17 million in unpaid compensation, almost $878,000 in interest, labor code violation penalties of $2,100 and $1 million. Keller also asked for unspecified damages for violation of civil code laws and punitive damages.

In its ruling, the FINRA panel described its decision with strongly-worded language regarding Wedbush’s compensation practices.

“The panel concludes that a major cause of this dispute is a poorly written and ambiguous employment contract and a corporate management structure that required personal approval from the majority shareholder of Respondent’s stock, Mr. Edward W. Wedbush, for all incentive payments to senior employees – which approval was routinely withheld,” the FINRA arbitration panel wrote in its decision.

The FINRA panel ordered Wedbush to pay Kelleher $3.5 million for damages, interest, penalties and attorneys’ fees. Wedbush has also been ordered to give Kelleher the vested option to buy 3,750 shares of Wedbush at $20 per share and 375 additional shares at $26 per share. Wedbush is also set to pay Kelleher $200 for the non-refundable portion of the FINRA filing fee.

Wedbush Securities founder and President Edward W. Wedbush was originally named as a respondent in the case, but Kelleher agreed to dismiss the charges against him during the hearing. That came after Edward W. Wedbush’s request to testify in person would have delayed the hearing.

Witnesses testified during the hearing that Edward W. Wedbush made the decisions to pay and withhold incentive compensation at the firm.

“He [Edward W. Wedbush] got a lot of credit for not getting caught up in the mortgage bubble or mortgage securities…he’s been given a lot of credit for being frugal, but kind of a smart conservative,” Kelleher’s lawyer Knudsen said. “He sees it as being conservative and frugal, and it is until it crosses the line.”