Merrill Lynch tries to avoid arbitration in dozens of cases with former executives

About 60 former wirehouse staff claim they lost about $400 million when their Merrill stock dropped in 2007-08 due to the firm's exposure to mortgage-backed securities

Mar 5, 2018 @ 1:55 pm

By Mark Schoeff Jr.

Usually brokerages want disputes with customers and their employees heard in arbitration. But Merrill Lynch is trying to push dozens of pending arbitration cases into court, causing plaintiffs to cry foul.

The cases involve about 60 former Merrill executives who claim they lost about $400 million in their brokerage accounts when the stock of Merrill Lynch & Co. took a nosedive in 2007-08 due to the firm's exposure to subprime mortgages and mortgage-related securities.

Merrill reached a $17 billion settlement with the Department of Justice in 2014 and admitted wrongdoing in the original case.

The former Merrill executives are seeking more than $1 billion in Finra arbitration because the offshore creation of the mortgage-backed securities involved RICO violations, which triple damages.

But Merrill is pursuing preliminary injunctions in several federal courts across the country in an effort to stop Finra arbitration.

"They're trying to prevent these cases from ever seeing the light of day in front of any Finra panel," said Paul Thomas of Thomas Law Group, who is a co-counsel for the plaintiffs. "Merrill is fighting tooth and nail to keep the truth away from these arbitrators. It's unprecedented what they're doing."

Merrill asserts the former executives' claims are not appropriate for arbitration because they revolve around the stock price of the parent firm, Merrill Lynch & Co., which is not a Finra member.

The arbitration agreements included in the former executives' accounts and in their employment contracts pertain to the firm's brokerage arm, Merrill Lynch, Pierce Fenner & Smith Inc., which is a Finra member.

"We're not trying to evade a determination on the merits," said Merrill spokesman Bill Halldin. "The question is where they're properly heard. Ultimately, these cases relate to the drop in the value of the stock of Merrill Lynch & Co., which are claims properly heard in court."

Merrill hasn't succeeded yet. They've lost three court decisions and have at least five pending. They recently filed in a Missouri federal court and have appealed a loss in a New Jersey court.

Nearly every brokerage contract has a mandatory arbitration clause. Claims made by clients, registered representatives and other employees are adjudicated in an arbitration system run by the Financial Industry Regulatory Authority Inc., the broker-dealer self-regulator.

Merrill Lynch & Co. was acquired by Bank of America in January 2009, in the midst of the financial crisis.

The collapse in the parent company's stock price is also part of Merrill Lynch history rather than a matter ripe for Finra arbitration, according to Mr. Halldin.

"The time to bring claims ended long ago," he said.

But a current Finra arbitrator said Merrill's behavior is unusual.

"Normally, firms are not afraid of arbitration if they feel strongly about their case. If they don't, they try to settle," said Neal Tourdo, global head of distribution at Haugen Equity Signals. "I don't know why [Merrill] wants to go to court. It seems kind of strange."

Andrew Stoltmann, president of the Public Investors Arbitration Bar Association, said that given the emphasis brokerages place on mandatory arbitration, it's "disingenuous" for Merrill to turn to court this time.

"If I tried to file [a customer dispute] in court, Merrill would want that case kicked into arbitration so fast, my head would spin," Mr. Stoltmann said.

But in this situation, Merrill may have better odds to prevail with its legal arguments in court. In arbitration, it's much more difficult to get cases dismissed.

The hearing for the first arbitration case is scheduled for January 2019.


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