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Judge thwarts Merrill’s end run on retention notes

A judge in New York state court ruled Thursday that Merrill Lynch must go to arbitration to pursue a broker for an unpaid note.
In the order, New York Supreme Court Judge Bernard Fried rejected the argument by the issuer of the retention notes, Merrill Lynch International Financial Inc., that it is not a broker-dealer and is therefore not required to arbitrate disputes with Merrill brokers.
The broker in the case, Todd Gutkin, left Merrill in April 2009.
As InvestmentNews previously reported, Merrill is bringing a series of collection cases in New York courts against brokers who owe money on the retention payments they received after the Bank of America Corp. merger.
The retention package notes, reportedly totaling about $3.6 billion, were issued in January. Brokers received anywhere from nothing up to 100% of annual production, with three-quarters of the amount paid upfront in cash under a seven-year note.
But brokers now caught up in collection actions are asking New York courts to send the cases to arbitration, as required under Financial Industry Regulatory Authority Inc. rules.
In his decision in the Gutkin action, the judge said that letting the case proceed in court “would be tantamount to forcing Gutkin to waive his right to arbitrate what is clearly an employment-related dispute.”
He ruled that Merrill Lynch, as a broker-dealer, “cannot escape its obligation to arbitrate under Finra by substituting MLIFI in its place” as issuer of the notes.
“From our perspective, what Merrill Lynch engaged in is trickery, or deception” in having the non-brokerage subsidiary issue loans to brokers, said attorney David Gehn, a partner at Gusrae Kaplan Bruno & Nusbaum PLLC. Mr. Gehn is representing Mr. Gutkin, who joined Morgan Stanley after leaving Merrill.
Merrill spokesman William Halldin could not say whether Merrill would appeal the ruling.
“The important point in these matters is that individuals promised to repay loans if they departed the firm,” he said in a statement. “In those instances where advisers have not lived up to their agreement, we will pursue repayment.”
Finra spokesman Herb Perone declined comment.