Merrill Lynch Defamation Ruins Stockbroker Career

November 9, 2016

Finally, a Finra Arbitrator gets it and thankfully makes the effort to note the devastating impact that defamation has on a veteran stockbroker's career. In pertinent part, the FINRA Arbitration Decision states:

FINRA picked up Respondent's defamatory language in the BrokerCheck, and the damage was done. Claimant's career was ruined when securities firms refused to hire her, and her ability to support herself and her family was destroyed.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in April 2015 and as amended thereafter, former Merrill Lynch registered representative Claimant asserted breaches of the employment agreement, contract, equitable and just principles of trade, fiduciary duties; tortious interference with advantageous business relationships; negligence and gross negligence; defamation and slander; retaliation; discrimination; creation of a hostile work environment; unpaid  wages; conversion and wrongful termination. Claimant sought $2,102,000 compensatory damages; $6,306,000 punitive damages, interest, costs, and fees. Further, Claimant sought the expungement of Central Registration Depository records ("CRD"). 

NOTE: At the sole discretion of the Blog, the name of the Claimant has been redacted.

In the Matter of the FINRA Arbitration Between [REDACTED], Claimant, vs. Merrill Lynch Pierce Fenner & Smith Inc., Respondent (FINRA Arbitration 15-00880, November 4, 2016).

SIDE BAR: Online FINRA BrokerCheck files as of November 9, 2016, indicate that Claimant was first registered in 1990.

Respondent Merrill Lynch generally denied the allegations and asserted various affirmative defenses.  


In September 2016, the parties stipulated to having reached a confidential resolution of all claims with the exception of the requested expungement. In furtherance of their settlement, the parties held a one-day, in-person expungement hearing before a sole FINRA arbitrator on October 18, 2016, on the sole issue of expunging Claimant's Form U5.

Arbitrator's Rationale

Following that expungement hearing, the sole FINRA Arbitrator issued this:

1.The Arbitrator finds that Claimant had over twenty years in the securities industry without any customer complaints and was completing a training program with Respondent Merrill Lynch. Her various accounts included a $20 million client she had recently brought to the firm, as well as an irrevocable trust account for her deceased grandfather and a revocable trust account for her elderly grandmother.

Unfortunately, Respondent and Claimant got caught in the middle of a family dispute where a complainant's mother was one of eleven siblings. The older siblings were satisfied with the grandmother's desire for income, while the younger group apparently wanted more growth. Led by the only brother and youngest of the siblings, the dissenters filed complaints with both Respondent and the local authorities, accusing the older faction of mismanagement and elder abuse.

Respondent's internal inquiry showed no irregularities in Claimant's handling of the firm's accounts, and the external allegations were investigated and dismissed by local law enforcement and family services.

The whole matter was finally resolved in a mediated guardianship proceeding without any showing of mismanagement or wrongdoing by anyone and without any loss of money in the investments. At one point the family factions even agreed for Merrill Lynch Trust to become trustee for the family trusts. However, the process was delayed because Respondent's legal department determined the court order was unclear and had to be modified.

The case was further delayed with other problems, including the practical mechanics of having so many people - eleven siblings, trustees, guardian, and multiple attorneys - signing so many legal documents in different places. For whatever reason, Respondent eventually decided not to serve as trustee. Of course, the squabble was frustratingly complicated and cost the estate and the individual siblings thousands of dollars.

After the grandmother's death and toward the end of the dispute, FINRA received an anonymous communication over its tip-line that contained rambling innuendos about how the matter was being handled. The statement was poorly written, riddled with misstatements, and defamatory in nature. FINRA forwarded the "tip" to Respondent, and the firm hired outside counsel and investigated the matter - once again.

As some point along the way, there was an administrative misunderstanding between Claimant and Respondent regarding Claimant's situation between the firm and the family. There was also a side issue concerning her dealings with a senior financial advisor - that is, his interest in her $20 million account, his questionable conduct, and the fact that she reported him to the human resources department.  

The preponderance of the evidence shows that Claimant sought help from and kept management advised regarding the family quarrel, but the situation was treated as "your problem" and not taken seriously until it got out of control. The clear inference from the evidence is that retroactive second-guessing played a role in Respondent's claim that Claimant's termination was based solely upon her unauthorized involvement in the family guardianship case.

Respondent eventually made an administrative decision to terminate Claimant as an employee, but acknowledged in the testimony and in closing argument, that the anonymous "tip" played no part in the decision to terminate.

Even under Respondent's theory of the case, the discredited "tip" received after the grandmother's death was neither relevant nor material to Claimant's termination, yet Respondent felt obligated to treat it as a legitimate complaint under FINRA's U5 reporting requirements.

FINRA picked up Respondent's defamatory language in the BrokerCheck, and the damage was done. Claimant's career was ruined when securities firms refused to hire her, and her ability to support herself and her family was destroyed.

Apparently, Respondent harbored no ill will toward Claimant. However, its fail safe interpretation of FINRA's reporting obligation created linkage between the bogus tip and Claimant's termination, and the resulting injury was defamatory in nature.

2. Therefore, the Arbitrator rules as follows:

The Arbitrator recommends the expungement of the Termination Explanation from Section 3 of [REDACTED by Blog]'s (CRD # 1941200) Form U5 filed by Merrill Lynch, Pierce, Fenner & Smith, Inc. on September 5, 2014 and maintained by the CRD. The Arbitrator recommends that the Termination Explanation in Section 3 be changed to: "There were no customer complaints, sales practice issues, or investment-related violations - merely a corporate decision." In addition, the Arbitrator recommends that the current Reason for Termination be expunged and changed to "Other."

The Arbitrator further recommends that the Yes answers to questions 7B and 7F(1) of the forgoing Form U5 be expunged and changed to No and the accompanying Disclosure Reporting Pages be deleted in their entirety . . .

Bill Singer's Comment

Bravo and thank you to FINRA Public Arbitrator James W. Geiger!

Yes, I have heard the criticism of expungement from many industry regulators and customer advocates; and, yes, I too agree that expungement is too often used to sanitize the records of those from whom the public needs to be protected. Why that revelation of my personal position surprises many folks always puzzles me because I am a former industry regulator and I also represent public customers in my law practice (as well as industry clients and whistleblowers). 

Apparently, I'm supposed to be a one-dimensional caricature so as to more easily fit the role of a convenient strawman for those who prefer dealing with punching bags rather than thoughtful human beings. As readers of the Blog know, I am an ardent advocate for Wall Street reform and a critic of inept and ineffective regulation. I make no apologies for criticizing the industry's self-serving and frequently foolish policies; and I will not make any apologies when I come to the defense of beleaguered industry participants such as Claimant. Wrong is wrong. Injustice is injustice.

My sense is that Public Arbitrator Geiger was as angered as I was by Merrill Lynch's cavalier and callous conduct in terminating Claimant.  The underlying circumstances that purportedly prompted the employer's action are aptly characterized by the arbitrator as "Claimant got caught in the middle of a family dispute." Not only was Claimant victimized by feuding relatives but she was further victimized by Merrill Lynch, which found it convenient to throw Claimant under the bus; and, sadly, that veteran employee now bears the tire marks of that encounter.