by Bill Singer
FINRA Hits Merrill Lynch With Historic $1 Million Fine For Circumventing Mandatory Arbitration During Collection of Employee Promissory Notes
January 26, 2012For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA") and without admitting or denying the findings, prior to a regulatory hearing and without an adjudication of any issue, Respondent Merrill Lynch, Pierce, Fenner & Smith Incorporated (‘Merrill Lynch") submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Respondent (AWC 2009020188101/January 25, 2012).
Few Wall Street firms are more iconic than Merrill Lynch, a FINRA member firm since 1937 with over 31,000 registered individuals and more than 1,200 branch offices.SIDE BAR: In accordance with terms set forth in an Agreement between the retained brokers and Merrill Lynch, following each month of employment, the firm made a payment minus taxes on a pro rata portion of the loan, over a period that typically lasted for a seven-year term. An acceleration of the loan balance's interest and principal repayment by the broker was typically triggered by the individual's bankruptcy, insolvency, failure to make a payment, or the termination of employment by Merrill Lynch for any reason.
[t]he undersigned agrees that any actions regarding the [n]ote, including actions to recover amounts due under this [n]ote, shall be brought solely in the Supreme Court of the State of New York in New York County.
On the surface, a seemingly hyper-technical legal maneuver. A well known FINRA rule is that all intra-industry disputes - between member firms and other member firms, between member firms and their associated persons - must be arbitrated before a FINRA arbitration panel. This is such an ironclad policy that it's know as "mandatory" industry arbitration. Mandatory as in no ifs, ands, or buts. How then did Merrill Lynch's ATP court-based collection pass FINRA muster?
SIDE BAR: The New York State court jurisdictional language provided Merrill Lynch with the ability to pursue collections of amounts due under the promissory notes in expedited New York court proceedings, as provided under New York State Civil Practice Law and Rule ("CPLR") 3213. An advantages of invoking CPLR 3213 is that New York State's expedited collection procedure restricts the debtor's ability to assert counterclaims against the creditor.
CPLR § 3213: When an action is based upon an instrument for the payment of money only or upon any judgment, the plaintiff may serve with the summons a notice of motion for summary judgment and the supporting papers in lieu of a complaint. The summons served with such motion papers shall require the defendant to submit answering papers on the motion within the time provided in the notice of motion. The minimum time such motion shall be noticed to be heard shall be as provided by subdivision (a) of rule 320 for making an appearance, depending upon the method of service. If the plaintiff sets the hearing date of the motion later than the minimum time therefor, he may require the defendant to serve a copy of his answering papers upon him within such extended period of time, not exceeding ten days, prior to such hearing date. No default judgment may be entered pursuant to subdivision (a) of section 3215 prior to the hearing date of the motion. If the motion is denied, the moving and answering papers shall be deemed the complaint and answer, respectively, unless the court orders otherwise.
SIDE BAR:
FINRA Code of Arbitration Rule 13200: Required Arbitration
(a) Generally
Except as otherwise provided in the Code, a dispute must be arbitrated under the Code if the dispute arises out of the business activities of a member or an associated person and is between or among:
- Members;
- Members and Associated Persons;
- or Associated Persons. . .
Bill Singer's CommentCORRECTIVE ACTION STATEMENTAs a corrective action, Merrill Lynch and MLIFI stopped pursuing ATP collection actions in New York state court in January 2010, and will not do so in the future.This Corrective Action Statement does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA or its staff.
[W]hat bothers me is the double standard that permeates all of Wall Street regulation. In this FINRA case, an individual stockbroker is rightfully barred from the industry for defrauding his employer through the submission of bogus business expenses, some of which are double-billed. A just comeuppance and good riddance!However, this high dudgeon, this moral outrage by FINRA just doesn't seem to apply to the big boys - be they senior management at major brokerage firms or the too-big-to-fail firms themselves. For example, remember this incident from about the same 2008 - 2009 time period involved in Lee's case?The Perfect OfficeNo longer content with the corner office or the penthouse in hues of teakwood, former Merrill Lynch CEO John Thain, whose tenure drove Merrill Lynch to lose $15 billion in the fourth quarter of 2009, spent $1,405 on a trash can. As his company was eliminating jobs, a newly acquired $87,000 rug graced the floor of his office.Most executives hire interior designers, and Thain was no exception hiring Michael Smith, of celebrity design fame. The tab for his designer office - $1.2 million."5 Outrageous CEO Spending Abuses and Perks" (Forbes "Personal Spending" by Investopedia, August 3, 2011).Thain's questionable office expenses in 2008 were well documented and have become the stuff of legend - and, yes, in the face of public outrage, he purportedly repaid the full cost of the renovation. On the other hand, did FINRA or any regulator bring charges against him for submitting those charges? . . .