Holding court: Merrill Lynch legal tack could help recover reps’ retention awards

Merrill Lynch & Co. Inc. is pursuing a legal strategy that could give it a leg up in collecting from brokers who owe the firm money on retention packages.
The move affects many of the approximately 6,200 Merrill brokers who accepted packages offered when Bank of America Corp. took over the brokerage firm last year. 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 instead of arbitration, brokers who took the deal and then left the firm without paying off their promissory notes are being taken to court in New York state — where it is easy for creditors to obtain relatively quick legal judgments against debtors.
Being forced into court “is an unknowing waiver of rights, to the tune of thousands of brokers” who took the retention deal, said David Gehn, a partner at Gusrae Kaplan Bruno & Nusbaum PLLC who is defending two former Merrill brokers in the New York courts.
The retention package notes, reportedly totaling about $3.6 billion, were issued in January by Merrill Lynch International Finance Inc., which is the legal entity pursuing reps for unpaid balances. Since MLIF isn’t a broker-dealer, it isn’t subject to mandatory arbitration, said Mr. Gehn, who thinks that Merrill’s legal strategy is a deliberate effort by the firm to avoid Finra rules that require arbitration.
The Financial Industry Regulatory Authority Inc. requires that disputes arising from the “business activities of a member or an associated person” be arbitrated. Brokers also agree on their U-4 registration forms to arbitrate claims.
But in court papers, MLIF argued that it “is not a party to any agreement [with brokers] whereby it agreed to arbitrate its claims.”
This year, MLIF brought at least eight note cases to New York courts. Some of those cases have been settled, while others are still pending, according to court records.
Financial advisers who accepted retention deals “agreed to repay those loans if they departed the firm,” said Merrill spokesman Bill Halldin. “In those instances where they have not lived up to their agreements, we’ve sought court orders to enforce the agreements.
For the complete version of this story, please see the Oct. 19 issue of InvestmentNews

Related Topics: Bank Of America Corp., Merrill Lynch