FINRA Arbitrators Cite Untimely RICO Claims By Former Merrill Lynch Executive

SIDE BAR: FINRA Rule 12504: Motions to Dismiss states in part:

(a) Motions to Dismiss Prior to Conclusion of Case in Chief

(1) Motions to dismiss a claim prior to the conclusion of a party's case in chief are discouraged in arbitration.

(2) Motions under this rule must be made in writing, and must be filed separately from the answer, and only after the answer is filed.

(3) Unless the parties agree or the panel determines otherwise, parties must serve motions under this rule at least 60 days before a scheduled hearing, and parties have 45 days to respond to the motion. Moving parties may reply to responses to motions. Any such reply must be made within 5 days of receipt of a response.

(4) Motions under this rule will be decided by the full panel.

(5) The panel may not grant a motion under this rule unless an in-person or telephonic prehearing conference on the motion is held or waived by the parties. Prehearing conferences to consider motions under this rule will be recorded as set forth in Rule 12606.

(6) The panel cannot act upon a motion to dismiss a party or claim under paragraph (a) of this rule, unless the panel determines that:

(A) the non-moving party previously released the claim(s) in dispute by a signed settlement agreement and/or written release;

(B) the moving party was not associated with the account(s), security(ies), or conduct at issue; or

(C) The non-moving party previously brought a claim regarding the same dispute against the same party that was fully and finally adjudicated on the merits and memorialized in an order, judgment, award, or decision. . . .

Claimant Brian Sepe was a decorated, long-term employee of Respondent who rose through the ranks of management and was, at some point, in charge of, and had responsibility for, one-sixth of the United States for Respondent. Claimant Brian Sepe previously received proceeds from an Employee Retirement Income Security Act of 1974 (ERISA) lawsuit filed against Respondent. On May 21, 2018, Claimant Brian Sepe filed this arbitration proceeding against Respondent, seeking damages as a customer and former employee. Claimant Brian Sepe's damages arise from the collapse in the market of the securitized residential mortgage-backed securities and collateralized debt obligations, which occurred prior to the merger of Respondent and Bank of America on or about January 2009. Despite being in an upper management position, Claimant Brian Sepe alleges that he did not have any knowledge of fraud on the part of Respondent until sometime after a settlement was reached with the Department of Justice and other regulators in August 2014. 

Respondent moved for dismissal of Claimant Brian Sepe's claims on the grounds that the claims are ineligible for arbitration under Rule 12206 of the FINRA Code of Arbitration Procedure for Customer Disputes. Rule 12206(a) provides: "No claim shall be eligible for submission to arbitration under the Code where six years have elapsed from the occurrence or event giving rise to the claim. The panel will resolve any questions regarding the eligibility of a claim under this rule." 

As Claimant Brian Sepe was in upper management, after the initial argument on Respondent's motion to dismiss on April 25, 2019, the Panel requested that Claimant Brian Sepe appear before the Panel for the limited purpose of determining when he had actual, constructive, or reasonable notice of the facts which underlie the fraud he was relying upon to avoid dismissal under the eligibility rule. Claimant Brian Sepe provided limited testimony on this issue before the Panel on September 11, 2019.

Claimant Brian Sepe has set forth multiple arguments in opposition to Respondent's Motion to Dismiss. Claimant Brian Sepe argues that the FINRA eligibility rule does not apply, as Rule 12206(c) of the Code of Arbitration Procedure for Customer Disputes provides in part: "The rule does not extend applicable statutes of limitations; nor shall the six-year time limit on the submission of claims apply to any claim that is directed to arbitration by a court of competent jurisdiction upon request of a member or associated person." Claimant Brian Sepe acknowledges that his claim was not directed to arbitration by any court but relies instead on decisions issued by courts in other matters that have referred similar claims to arbitration. As Claimant Brian Sepe's claim was not referred to arbitration by any court, the Panel finds Rule 12206(c) inapplicable. 

Claimant Brain Sepe alleges the existence of an ongoing pattern of loss based on the allegation that certain stock options he possessed expired worthless during the six-year eligibility period. As there is no allegation that the options had any value at any time during the eligibility period, the Panel discounts any claim that the expiration of the option period constituted a new loss. 

Claimant Brian Sepe alleges that the eligibility rule is subject to equitable tolling based upon Respondent having engaged in secretive fraudulent activities that were unknown to Claimant Brian Sepe and that could not have been discovered by Claimant Brian Sepe until after the August 2014 Department of Justice report. The parties are compelled to arbitrate this dispute as a matter of contract. Arbitration before FINRA Office of Dispute Resolution is subject to the applicable Code of Arbitration Procedure. Rule 12206 of the FINRA Code of Arbitration Procedure for Customer Disputes imposes a six-year time limit for claims to be eligible for arbitration. Neither Rule 12206 nor any other rule in the FINRA Code of Arbitration Procedure for Customer Disputes enables a panel to toll the six-year time period set forth in Rule 12206. This Panel therefore determines that the six-year eligibility period is not subject to tolling.

Finally, the Panel determines that if the six-year time period under Rule 12206 can be tolled, equitable tolling is not proper as to Claimant Brian Sepe. Claimant Brian Sepe was in an upper management position at Respondent. Claimant Brian Sepe participated in a prior ERISA claim against Respondent. Claimant Brian Sepe was highly experienced in the industry and chose to not concern himself with prior claims against Respondent, news, books, and articles regarding allegations of fraud against Respondent that would have put him on notice of the alleged fraud more than six years prior to the filing of this arbitration. 

On April 16, 2019, Claimant Brian Sepe sought leave to amend his Statement of Claim to add his wife, Dawn Sepe, to the proceeding, as the accounts were joint accounts. This amendment did not otherwise change the Statement of Claim. 

The Panel was concerned that the initial Motion to Dismiss did not address Claimant Dawn Sepe or the Amended Statement of Claim, as the initial Motion to Dismiss was filed prior to the amendment. The Panel requested additional information and argument from the parties. The parties agreed that the evidence and arguments made at the prior in-person hearings would be applicable to Claimant Dawn Sepe. Respondent filed its Motion to Dismiss the Amended Statement of Claim and the Claimants responded thereto. To ensure compliance with Rule 12206, the Panel requested a telephonic prehearing conference which was conducted on December 20, 2019. After consideration of the parties' filings and arguments at the December 20, 2019 prehearing conference, the Panel finds that the arguments applicable to Claimant Brian Sepe are also applicable to Claimant Dawn Sepe and that new arguments made on behalf of Claimant Dawn Sepe are not sufficient to make her claims eligible for arbitration under Rule 12206.

For the above-stated reasons, Respondent's Motion to Dismiss and Amended Motion to Dismiss pursuant to Rule 12206 are granted. Accordingly, the Panel did not make a determination as to Respondent's Motion to Dismiss pursuant to FINRA Rule 12504.

Bank of America Global Wealth and Investment Management (GWIM) has announced that Brian Sepe, head of the Latin American business, will retire in November.

. . . 

Sepe's career as a financial advisor began in 1979. He moved into a managerial role at Merrill Lynch's private wealth group in 1992, ultimately running the high-profile U.S. Northeast division in 2008 and then taking on the role of head of Latin America GWIM in 2009.

Sepe twice earned recognition for managing one of the most successful Merrill Lynch offices in the country. His leadership in cultural and community activities earned him Merrill Lynch's first-ever "Responsible Citizen Award" in 2004. . . .

Finally, the Panel determines that if the six-year time period under Rule 12206 can be tolled, equitable tolling is not proper as to Claimant Brian Sepe. Claimant Brian Sepe was in an upper management position at Respondent. Claimant Brian Sepe participated in a prior ERISA claim against Respondent. Claimant Brian Sepe was highly experienced in the industry and chose to not concern himself with prior claims against Respondent, news, books, and articles regarding allegations of fraud against Respondent that would have put him on notice of the alleged fraud more than six years prior to the filing of this arbitration. 

On November 3, 2004, Claimant, after being a financial advisor with Respondent for 9 years with a clean record, was abruptly terminated by Respondent's Regional Complex Director, Brian Sepe ("Sepe"). Without giving Claimant the opportunity to answer. Claimant was accused, not by any customers, but by Sepe, of trading in two accounts on a discretionary basis and providing confidential information to his wife, who Claimant asked to be available for any translation that might have been needed for a Venezuelan client, hereinafter referred to as "Customer #1". Claimant was also accused by Respondent of making discretionary trades in Customer #1 's account in July of 2004 with regard to placing orders for the purchase of offshore mutual funds which could only be purchased by non-U.S. citizens. No written complaint or affidavit of Customer #1 was presented to the Panel by Respondent. 

The second account upon which Sepe based Claimant's termination was regarding another customer, hereinafter referred to as "Customer #2", wherein Sepe and other employees of Respondent accused Claimant of making a discretionary trade in her account regarding the sale of certain IRA assets which, by law, required one of the IRA's to be liquidated for a mandatory distribution due to her age.

The sole basis that there was a discretionary trade resulted from an email received from Customer #2 dated October 18, 2004, questioning why one IRA investment rather than another was being sold.

I. THE INTENTIONAL ACTIONS OF BRIAN SEPE 

The first ground that sustains Claimant's request for punitive damages concerns Respondent's Regional Complex Director, Brian Sepe's conduct ("Sepe"). In this arbitration, Sepe was shown to be Respondent's employee. Without doubt, Mr. Sepe's conduct toward Claimant, as detailed in the Statement of Claim and by way of testimony and exhibits presented during the hearing, was not merely grossly negligent, it was intentional. Sepe terminated Claimant and destroyed Claimant's ability to become employed in the securities industry by allowing a false and defamatory Form U5 to be filed by Respondent. Sepe failed to follow the advice of Respondent's compliance counsel, Neil Eisenstadt ("Eisenstadt"), to substantiate the allegations and failed to conduct a proper investigation of the facts and available documentation, which if done, would have demonstrated that there was no basis in fact to terminate Claimant's employment and place defamatory and slanderous statements within the Form U5. Sepe claimed that he never had any input or influence regarding the language to be placed in the Form U5. This statement was contrary to the evidence received by the Panel. Sepe never followed up with Marc Tendler's request for phone records regarding the Customer #1 trades in July of 2004. Sepe never attempted to speak with Customer #1 to verify if he spoke only Spanish. Sepe refused to accept Customer #2's letter of November 11, 2004, denying that discretion was used in her account. Sepe never sought to have Respondent obtain an affidavit or any written complaint from Customer #1, but instead relied on Martha Chinea ("Chinea"), Vice President and Administrative Manager of the Respondent's Coral Gables, Florida office, speaking to Customer #1 one on one without any other witnesses on the telephone. Sepe testified that he never felt he needed any more evidence. The testimony and exhibits demonstrated that prior to Sepe becoming Claimant's manager. Claimant was in line for a career in management at Respondent. Sepe, upon learning over lunch that Claimant was a representative of an ethnic minority, put the breaks on Claimant's desire to become a manager. Claimant was reduced from management, and basically sent to a corner to be eventually terminated. Thus, for these acts alone. Respondent may be (and is) held liable for punitive damages. Fla. Stat. Section 768.72(3).  

• FINRA
• Arbitration
• Merrill Lynch
• Sepe
• RMBS
• CDO
• RICO
• punitive damages
• Zojaji
• NASD
• Rule 12206
• Rule 12504
• BrokeAndBroker
• Bill Singer