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Merrill Lynch KO'd In $1.6 Million Note Arbitration
October 18, 2016
With many FINRA arbitrations involving a member firm's collection efforts against former employees for balances on promissory notes, there is a sense of confidence that tends to imbue the claimant employer's initiation of litigation. Going by anecdotal evidence, FINRA member firms have a superb track record with such cases. Of course only those member firms get to vote on anything at FINRA, which is, after all, the organization providing the arbitration forum. To be fair, however, there are many dead-beats and dishonorable former employees who are hell bent on simply delaying the inevitable (and just) order to repay the outstanding loan balances.
On the other hand, if you read enough FINRA Arbitration Decisions involving promissory note collection efforts, you note a disquieting line of cases where it appears that a former employer engaged in bait-and-switch when it lured top producers to its offices only to sandbag those new hires with policies and procedures that were never discussed during the interviews or seemed oddly tailored to frustrate the recent hires.
You wouldn't think that anyone would want to run a business that way. Then you realize that the way some executives run some Wall Street brokerage firms is the reason why many of those firms didn't survive the Great Recession and why this country almost went down as collateral damage.
In today's BrokeAndBroker.com Blog, we consider the cage match between former employer Merrill Lynch, Pierce, Fenner & Smith, Inc. and two former employees. The battle starts as a fairly mundane dispute over nearly $1.6 million in alleged damages attendant to the employees' promissory notes. The match ends with the major brokerage firm battered, bleeding, and defeated.
[R]espondents alleged that Merrill Lynch had a financial incentive to terminate them for cause. Respondents asserted that they were not terminated for cause. Accordingly, Respondents claimed that any amount they could owe Merrill Lynch on the Notes is offset because, inter alia, Merrill Lynch owes them the same amounts under their employment agreements.Respondents sought at least $5,000,000 in compensatory damages plus attorneys' fees, costs, and a recommendation of the expungement of this matter from their Central Registration Depository records ("CRD"). At the close of the hearing, Respondents requested $16,000,000.00 in compensatory damages for Reed and $13,000,000.00 for Barrionuevo. Award Having set the stage for a dramatic clash between Merrill Lynch and two former employees, the FINRA Arbitration Panel delivers an equally breath-taking award. The arbitrators denied Merrill Lynch's claims against each Respondent and found that Reed and Barrionuevo "have no liability to Merrill Lynch, Pierce, Fenner & Smith, Inc. under the employment agreement or the promissory notes." Accordingly, the Panel found Merrill Lynch liable to and ordered it to pay to Reed and Barrionuevo each $400,000 in compensatory damages with 6% per annum interest from the date of the service of the award until its full payment plus $107,500 in attorneys' fees. Consequently, the Panel ordered Merrill Lynch to pay $800,000 in compensatory damages with interest plus $215,000 in attorneys' fees. Expungement In recommending expungement, the arbitrators noted that Reed and Barrionuevo were not parties to the settlement agreement between Merrill Lynch and a customer whose alleged complaints allegedly served as the basis for the firm's termination of the two employees. The arbitrators further observed that Reed and Barrionuevo did not contribute to the customer settlement. Moreover, the customer had submitted "two letters essentially saying that the brokers should not be penalized and should not have marks on their records in connection with his claim." In explaining their expungement recommendation, the FINRA Panel of Arbitrators offered this rationale:
In recommending expungement, the Panel relied on the following: letters the customer wrote to Merrill Lynch that stated that Reed and Barrionuevo had done nothing wrong and that no adverse action should be taken against them; testimony that Merrill Lynch's investigation had established that the customers demand for a settlement was meritless; testimony that Merrill Lynch then paid the customer a settlement, at an amount higher than demanded, with no input from Reed and Barrionuevo and then placed this settlement on Reed's and Barrionuevo's records; the promissory notes that the customer sent to Reed and Barrionuevo that they did not sign or respond to; the employment agreements with Reed and Barrionuevo that gave Merrill Lynch a strong economic incentive to find that Reed and Barrionuevo should be terminated for cause after they brought their book of business to Merrill Lynch; the testimony that many other Merrill Lynch employees knew of the customers stated grievances, but were not terminated; the evidence that Reed and Barrionuevo reported the promissory notes to Merrill Lynch's compliance professional in an early September meeting, which meeting was corroborated by the phone logs of calls between Reed and Barrionuevo on September 8 and the almost contemporaneous entry of notes concerning the meeting; a Merrill Lynch witness's contradictory, but unbelievable testimony that there was no such meeting because she had a doctors appointment even though she could provide no documentation of such appointment; a Merrill Lynch witness's unbelievable testimony that Merrill Lynch was fearful that the customer's complaint would place Merrill Lynch at a severe litigation risk; a Merrill Lynch witness's inability to explain why, if the brokers were wrong in not reporting the customer's attempt to extort the brokers, Merrill Lynch continues to have the customer as a multimillion dollar client; undisputed testimony that after Reed and Barrionuevo had reported the promissory note threats, Merrill Lynch took no action for five months and Reed and Barrionuevo's supervisor told the brokers to just continue working and not worry about the customer.The Panel recommended the expungement of Reed's Form U5 as filed by Merrill Lynch on March 26, 2015, and Barrionuevo's Form U5 as filed on March 25, 2015. The Panel called for changing the "Reason for Termination" to "Other" and the "Termination Explanation" to "terminated without cause -- not performance or compliance related." Pointedly, the Panel rejected Merrill Lynch's commentary that Reed and Barrionuevo had failed to properly report a customer complaint. Further, the Panel recommended conforming changes to Form U5 Questions 7B for Reed and 7F(1) for both Reed and Barrionuevo so that both displayed "NO" answers (along with the deletion of the applicable Disclosure Reporting Pages).The applicable questions on the Uniform Termination Notice for Securities Industry Registration ("Form U5"):
In a final stinging rebuke of Merrill Lynch's conduct, the Panel offered this:3. FULL TERMINATIONIs this a FULL TERMINATION?Note: A "Yes" response will terminate ALL registrations with all SROs and all jurisdictions.Reason For Termination:[]Discharged []Other []Permitted to Resign []Deceased []VoluntaryTermination Explanation:If the Reason for Termination entered above is Permitted to Resign, Discharged or Other, provide an explanation below:If amending the Reason for Termination and/or termination explanation, provide an explanation below:. . .Internal Review Disclosure7B. Currently is, or at termination was, the individual under internal review for fraud or wrongful taking of property, or violating investment-related statutes, regulations, rules or industry standards of conduct?. . .Termination Disclosure
7F. Did the individual voluntarily resign from your firm, or was the individual discharged or permitted to resign from your firm, after allegations were made that accused the individual of:
1. violating investment-related statutes, regulations, rules or industry standards of conduct?
2. fraud or the wrongful taking of property?
3. failure to supervise in connection with investment-related statutes, regulations, rules or industry standards of conduct?
The Panel recommends that the above information on the brokers' Form U4s and Form U5s be expunged because the Panel does not find credible Merrill Lynch's explanation for the brokers' termination. Merrill Lynch witnesses testified that the termination was occasioned by management's loss of confidence in the brokers because they improperly handled a complaint by the customer. The brokers supposedly violated Merrill Lynch rules and industry standards because they did not immediately inform their employer of the customers dissatisfaction. To the contrary, however, the evidence bears out that the brokers were fired because Merrill Lynch wanted to retain the customers lucrative business without having to honor the transitional compensation contract with the brokers. The letters from the customer state explicitly that the brokers had done nothing wrong with the handling of his complaints and that no negative action against the brokers was called for. Furthermore, the customer admitted that he was surprised that Merrill Lynch offered him a settlement, much less a settlement that exceeded the amount he demanded. Even Merrill Lynch's own investigation concluded that Reed and Barrionuevo had done nothing wrong. Merrill Lynch says it settled because it feared legal action by the customer and that the settlement was simply to avoid the risks and expense of arbitration. But there could be little litigation risk if Merrill Lynch had in hand two letters from the customer to the effect that his claim lacked merit. That settlement reinforces the notion that retaining the customers business, not the brokers actions, was Merrill Lynch's primary concern.Bill Singer's Comment A standing ovation for three FINRA arbitrators who understand their role and who have discharged their obligations with impressive competency and dedication. Compliments for a cogent and compelling Decision replete with necessary content and context. Now . . . let's see if the good regulators at FINRA take the time to read this FINRA Arbitration Decision and do anything . . . anything . . . to restore the lost confidence of registered representatives in the integrity of the industry's self-regulatory organization. At some point, these post-employment disputes step over the line of acceptable jockeying and move into territory that looks a lot like compliance and regulatory misconduct. I will leave the final determination on such questions to the regulators at FINRA but we must all wonder whether there is any interest in even investigating this recurrent issue. By way of a gentle prod, let me close with these quotes from the arbitrators' observations in the Decision:
- the employment agreements with Reed and Barrionuevo that gave Merrill Lynch a strong economic incentive to find that Reed and Barrionuevo should be terminated for cause after they brought their book of business to Merrill Lynch
- a Merrill Lynch witness's contradictory, but unbelievable testimony that there was no such meeting because she had a doctors appointment even though she could provide no documentation of such appointment
- a Merrill Lynch witness's unbelievable testimony that Merrill Lynch was fearful that the customer's complaint would place Merrill Lynch at a severe litigation risk
- a Merrill Lynch witness's inability to explain why, if the brokers were wrong in not reporting the customer's attempt to extort the brokers, Merrill Lynch continues to have the customer as a multimillion dollar client
- the Panel does not find credible Merrill Lynch's explanation for the brokers' termination
- the evidence bears out that the brokers were fired because Merrill Lynch wanted to retain the customers lucrative business without having to honor the transitional compensation contract with the brokers
- Even Merrill Lynch's own investigation concluded that Reed and Barrionuevo had done nothing wrong
- That settlement reinforces the notion that retaining the customers business, not the brokers actions, was Merrill Lynch's primary concern