Merrill Lynch Wins A Round Against Former Employees in FINRA Arbitration

March 18, 2019

For some four decades from 1959 until his retirement in 1998, James A Billington was an associated person of Respondent Merrill Lynch and its former Western Regional Director. During his tenure at what was once called "Mother Merrill" or "The Thundering Herd," Billington got Merrill stock and stock options, which he put into his Trust. Alas, mom didn't age that well and the herd got thinned out. In January 2008, during the onslaught of the Great Recession, Bank of America acquired Merrill Lynch. Shortly after his Merrill stock was swapped out for Bank of America stock, Billington sold his holdings and took a proverbial bath. In September 2014, Billington died, but that only begins the saga of his Trust's lawsuit against his former employer.

Case In Point 

In a FINRA Arbitration Statement of Claim filed in June 2017 and as amended thereafter, public customer Claimant Billington asserted  fraud; breaches of contract and of fiduciary duty; violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), state labor statutes, FINRA rules and SEC rules; wrongful attempt to avoid FINRA jurisdiction in violation of industry rules; failure to disclose wrongful actions in violation of industry rules; and conspiracy with other entities and individuals to avoid liability for wrongdoing. As set forth in the FINRA Arbitration Decision, Claimant alleged that Respondent Merrill Lynch "was involved in the securitization and distribution of a series of mortgage-backed products, and allegedly engaged in various fraudulent activities concerning these products which caused losses for Claimant." Claimant sought in excess of $100 million in compensatory damages for the alleged loss in value of the MER stock held in the Trust account plu punitive damages, interest, disgorgement, treble RICO damages, costs, and expenses. In the Matter of the Arbitration Between Christina Billington as Successor Trustee for the James A. Billington Trust, Claimant, v. Merrill Lynch, Pierce, Fenner & Smith Incorporated, Respondent (FINRA Arbitration Decision 17-01678, March 14, 2019)

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

Motion Sickness

Starting in August 2018, we begin a round of motion practice that only a lawyer could comprehend (and not all lawyers at that) and only a lawyer could love (and that would include a lot of sociopaths). In presenting you with the cited motion practice, I could give it a shot and try to parse through the events and attempt to explain it all but, hell, I"m not sure that it's worth the time, so here's the direct quote from the FINRA Arbitration Decision:

On August 1, 2018, Respondent filed a Motion to Dismiss the Updated Second Amended Statement of Claim as Ineligible for Arbitration under Rule 12206 ("Motion to Dismiss"). On September 14, Claimant filed an opposition to the Motion to Dismiss. On October 1, Respondent filed a reply in support of the Motion to Dismiss. On October 2, Claimant filed a sur-reply in opposition to the Motion to Dismiss. On October 5, Respondent filed a response to Claimant's sur-reply, and on October 8, Claimant submitted another response. 

On November 9, Claimant submitted a Notice of Supplemental Authority in opposition to the Motion to Dismiss ("Supplemental Authority"), including orders from other FINRA arbitration cases. On November 13, Respondent filed a response to the Supplemental Authority. On November 21, Claimant filed a response to Respondent's response, and on November 25, Respondent filed another response. On November 27, Claimant filed a Second Notice of Supplemental Authority. On December 3, Claimant filed another Notice of Supplemental Authority. On December 4, 2018, the Panel ordered that the "parties shall cease additional briefings in this matter except upon a showing of new evidence or new law having precedential value. FINRA rules provide only for moving papers, opposition papers and reply papers. In general, additional briefing is not permitted and the panel will not consider it. Decisions from other arbitration panels have no precedential value." 

On February 7, 2019, Respondent filed demonstrative exhibits in support of the Motion to Dismiss. On February 13, Claimant filed demonstrative exhibits in opposition to the Motion to Dismiss. 

On February 14, 2019, the Panel held a recorded pre-hearing conference to hear oral argument on Respondent's Motion to Dismiss.

Too Late

The FINRA arbitrators were likely screaming "uncle"  by the time they granted Respondent Merrill Lynch's Motion to Dismiss. Accordingly, Claimant's claims were dismissed but without prejudice -- which means the Trust can pursue these claims in court providing that a court will entertain them as timely. In dismissing the FINRA arbitration, the arbitrators offered this rationale:

James A. Billington ("Billington") was an Associated Person employed by Respondent from approximately 1959 until 1998, when he retired. As part of his employment, Respondent provided him with MER stock and stock options. In January 2009, after Bank of America (BAC) acquired Respondent, the MER stock was converted to BAC stock. The securities were held in the name of the Trust, with Billington as trustee. On January 15, 2009, Billington sold all his BAC stock at a substantial loss. 

Billington passed away on September 7, 2014. His daughter Christina became the successor trustee of the Trust and is the claimant in this matter. 

Claimant filed the Statement of Claim on June 23, 2017, based on the loss on the sale of the stock. Respondent then filed a federal court action, seeking to stay this arbitration pending resolution of the court proceeding, among other things. The federal court ultimately denied Respondent's request, and ordered the parties to complete this arbitration. 

Respondent then filed a Motion to Dismiss arguing that the case was barred by the six-year limitations period in FINRA Code Rule 12206(a). 

Claimant opposed the Motion to Dismiss on several grounds: (1) Rule 12206 was inapplicable because the case had been directed to arbitration by a court; (2) the six-year period should be equitably tolled due to Respondent's alleged fraud and concealment; and (3) the hearing on the Motion to Dismiss should be delayed to allow Claimant to complete discovery allegedly necessary to adequately oppose the motion. Respondent then filed its reply, arguing that the opposition was insufficient. 

Rule 12206(a) provides that a claim may not be filed more than six years after "the occurrence or event giving rise to the claim." It is up to FINRA, not the courts, to determine the scope and application of Rule 12206(a). Huitt v. Wilbanks 2017 Lexis U.S. District 173164 at *11 (USDC D. Colo.), citing Howsam v. Dean Witter Reynolds, Inc. (2002) 537 U.S. 79, 85, 123 S. Ct. 588, 154 L.Ed.2d 491. If a claim is filed beyond the six-year deadline, it must be dismissed. 

All of the key events underlying the claim occurred prior to January 15, 2009, more than six years before the filing of the Statement of Claim. Any damages Billington allegedly sustained became fixed upon the sale of his BAC stock in January 2009. The extension provided in Rule 12206(d) is inapplicable, since the Statement of Claim originated with FINRA, and not with a court filing. Moreover, the issues relating to Respondent's financial problems had been publicized at length prior to BAC's acquisition of Respondent by January 2009. In fact, the Statement of Claim refers to an article by author William D. Cohan entitled, "The Final Days of Merrill Lynch." That article was published in The Atlantic magazine in September 2009! 

The facts that the Securities Exchange Commission did not release its investigative report, and that BAC did not agree to the $17 billion fine until 2014, are immaterial. Those developments were merely the culmination of events and reporting which had occurred years earlier. 

Finally, the Panel denies Claimant's request to defer its ruling until Claimant completes discovery. Given that the relevant facts occurred well over six years prior to the filing of the Statement of Claim, and given that there was adequate information available to put Billington on notice of Respondent's financial problems and potential improprieties, both through information issued by Respondent, and information available publicly, there is no basis for an argument that further discovery would support Claimant's contention that the Statement of Claim was timely filed. 

For all of these reasons, the Panel unanimously grants Respondent's Motion to Dismiss and dismisses Claimant's claims.

Bill Singer's Comment

Converting from MER to BAC

In case you missed it, this was not a case brought by a public customer. James A Billington was an associated person of Respondent Merrill Lynch for some four decades from 1959 until his retirement in 1998 -- and he was the firm's Western Regional Manager. By way of context, this is set forth in part in Wikipedia's Merrill Lynch entry[Ed: footnotes omitted]: 

[O]n Sunday, September 14, 2008, Bank of America announced it was in talks to purchase Merrill Lynch for $38.25 billion in stock. The Wall Street Journal reported later that day that Merrill Lynch was sold to Bank of America for 0.8595 share of Bank of America common stock for each Merrill Lynch common share, or about US$50 billion or $29 per share. This price represented a 70.1% premium over the September 12 closing price or a 38% premium over Merrill's book value of $21 a share, but that also meant a discount of 61% from its September 2007 price.

As noted in "Bank of America Completes Merrill Lynch Purchase" (Press Release, PRNewswire, Bank of America / Investor Relations / January 1, 2009),
on January 1, 2009, Bank of America completed its purchase of Merrill Lynch & Co., Inc. All of which meant that Mr. Billington's Merrill Lynch holdings were converted into BAC stock. 

Keep in mind that Billington had retired in 1998, which was more than a decade before his MER stock was converted into BAC stock. In what did not amount to a glowing vote of confidence in the merger, on January 15, 2009, James A. Billington sold his BAC stock at what the FINRA Arbitration Decision characterized as a "substantial loss." Historical data discloses that BAC stock closed at $8.32 per share for trade date January 15, 2009. For trade date March 15, 2019, BAC stock closed at $29.30 per share. Billington died in September 2014, and his daughter, Christina became the Trust's successor trustee. In 2017, the Trust sued to recover its alleged damages; and, clearly, the FINRA Panel of Arbitrators deemed that date as outside the six-year eligibility period. 

Merrill Lynch Motions to Enjoin FINRA Arbitrations

An interesting aspect of the Billington FINRA Arbitration is its transit through the federal courts. In Merrill Lynch, Pierce, Fenner & Smith Incorporated, Plaintiff, v. Christina Billington as Successor Trustee for the James A. BIllington Trust; Steven Moreno; and Donald Straszheim, Defendants (Complaint for Declaratory and Injunctive Relief, United States District Court for the Central District of California, 17-CV-08150 / November 8, 2017), Plaintiff Merrill Lynch asserted in part that:

1. This is an action to enjoin proceedings in three FINRA arbitrations (the "FINRA Arbitrations") that Defendants have recently initiated in this district against MLPF&S. In the FINRA Arbitrations, Defendants assert identical untimely fraud claims seeking recovery for the alleged decline in the value of their Merrill Lynch & Co., Inc., ("ML & Co.") stock holdings. ML & Co.-- not MLPF&S --issued the stock that Defendants claim declined in value. As described below, Defendants assert various misrepresentations and omissions by ML & Co. that allegedly resulted in the decline in the stock's value. Defendants do not make any allegation against MLPF&S relating to its role as broker-dealer, let alone assert that MLPF&S's acts as broker-dealer caused their loss. These claims do not belong in arbitration at all, let alone in an arbitration against MLPF&S.1 
Footnote 1:  Defendants' operative FINRA statements of claim (without voluminous attachments, consisting of public records) are attached as Exhibits B-D to this Complaint. In addition to these three FINRA claims, Defendants' counsel has filed, to date, sixteen other FINRA claims against MLPF&S across the country making identical allegations. None of these claims are appropriate for FINRA arbitration. MLPF&S intends to seek to enjoin all such inappropriately filed FINRA claims. MLPF&S reserves all rights arising under any class action settlement agreement pertaining to classes as to which any Defendant or predecessor-in-interest was a member, or other agreements as to which any Defendant or predecessor-in-interest was a party. MLPF&S further reserves all rights, arguments, and defenses, including with respect to jurisdiction and venue, in the event Defendants elect to dismiss their FINRA arbitrations and file claims in this or any other court. 

Page 2 of the Complaint

In presenting the bases for contesting Defendants resort to FINRA arbitration, Plaintiff alleges in part that:

2. In the arbitration statements of claim, each Defendant asserts that he or she was injured as a result of ML & Co.'s failure to disclose its alleged risks and activities related to subprime mortgage originations and subprime mortgage-related securities prior to 2008. Defendants assert that ML & Co.'s concealment of "billions of dollars of fraudulent mortgages and fraudulent RMBS and CDOs" (two types of mortgage-related securities) caused the Defendants to hold onto ML & Co. stock and suffer injury when the value of the stock declined. 

3. Defendants allege that they were injured by the decline in value of their ML & Co stock holdings. Defendants also cite ML & Co.'s conduct and public statements of ML & Co. management -- including its CEO and CFO -- as the cause of those injuries. Defendants do not, however, name ML & Co. as a respondent in their FINRA Arbitration claims. ML & Co. was not, and has never been, a FINRA member. To bring an action against ML & Co., Defendants would have to file suit in court. MLPF&S, by contrast, is a FINRA member -- but it did not engage in the conduct that Defendants cite as causing their injuries. Nevertheless, MLPF&S now finds itself named as the respondent in the Defendants' FINRA Arbitration claims. 

4. The reason Defendants have filed these claims against the wrong party (MLPF&S) and in the wrong forum (FINRA) is obvious: Defendants' claims are time-barred under applicable statutes of limitation and contain obvious facial defects. Private securities class actions and other investor actions against ML & Co. made allegations similar to Defendants' as early as 2007. Indeed, the Southern District of New York and the Second Circuit have held that shareholders were on notice for statute of limitations purposes no later than May 2009 of such claims against ML & Co. 

5. Defendants have brought their claims in FINRA arbitration to delay focus on the applicable statutes of limitations and other facial defects in their claims. If Defendants' claims were to proceed before FINRA, despite their obvious defects (namely, that the claims target MLPF&S for ML & Co.'s alleged conduct, are untimely, and fail to state a claim), MLPF&S may not have the immediate ability to seek dismissal of claims in FINRA without participating in discovery and engaging in a full and unnecessarily wasteful hearing on the merits years into the arbitration. 

6. FINRA, however, is an improper forum for Defendants' claims. A claim against a FINRA member (such MLPF&S) is arbitrable before FINRA only if the claim is connected to the FINRA member's business activities. But Defendants' claims arise out of injuries that ML & Co.-not a FINRA member-allegedly caused to its shareholders through its alleged conduct and public statements over a decade ago. While Defendants allegedly held their ML & Co. stock holdings in MLPF&S brokerage accounts, Defendants' claims and alleged injuries do not arise out of any actions MLPF&S took as their broker. Defendants' claims, therefore, are not arbitrable. Their attempt to shoehorn untimely and meritless allegations targeting ML & Co.'s alleged conduct into FINRA arbitration claims against MLPF&S is improper. 

Pages 3 - 4 of the Complaint

In specifically addressing the Billington claims, Plaintiff asserts in pertinent part that:

The Billington Arbitration 

25. On June 23, 2017, Billington filed a Statement of Claim in FINRA arbitration ("Initial Statement of Claim"). In the Initial Statement of Claim, Billington asserted that "Merrill Lynch" had misstated its exposure to risky mortgages during the housing bubble, causing the value of the Billington Trust's ML & Co. stock holdings to decline once the full extent of ML & Co.'s exposure to subprime mortgages allegedly became known. 

26. Billington named "Merrill Lynch, Inc." as the respondent in the Initial Statement of Claim. There is no such corporate entity. In subsequent correspondence, Billington's counsel confirmed that he had actually intended to name ML & Co. as the respondent. Moreover, on or around July 26, 2017, Billington entered into a tolling agreement relating to the claims raised in the FINRA arbitration in which Billington agreed that ML & Co. had been "incorrectly identified in the [arbitration] as Merrill Lynch, Inc.," confirming that Billington's claims targeted alleged conduct by ML & Co. The tolling agreement pertained only to claims against ML & Co., not MLPF&S. ML & Co., as noted above, is not a FINRA member. 

27. The Initial Statement of Claim on behalf of Billington requested assignment to FINRA's Los Angeles office and the arbitration was assigned there.

28. On June 28, 2017, Billington's attorney followed up with a letter attaching the Initial Statement of Claim. In the June 28 letter (Ex. A), Billington's counsel alleged that James Billington, the former trustee of the Billington Trust, "was misled by Merrill Lynch, Stanley O'Neal, John Thain, and others on investor conference calls regarding the financial health of the firm. As the victim of these false statements he lost over $100 million on his MER shares." Messrs. O'Neal and Thain were former CEOs of ML & Co.-the publicly traded company- and any "investor conference calls" they would have spoken on were ML & Co. calls. 

29. On September 21, 2017, Billington filed an Amended Statement of Claim ("Amended Statement of Claim") (Ex. B). The Amended Statement of Claim substituted MLPF&S, a FINRA member, as the sole respondent. 

30. Although the Amended Statement of Claim names MLPF&S as respondent, its substantive allegations are virtually identical to those made in the Initial Statement of Claim (which, as noted, Billington's counsel admitted had been directed at ML & Co.). In addition, the focus of the Amended Statement of Claim remains the activities of ML & Co and the decline of the Billington Trust's ML & Co. stock holdings as allegedly caused by ML & Co. conduct and statements. The Amended Statement of Claim again alleges that "Merrill Lynch and its top officers committed fraud upon the public, including Mr. Billington, by concealing . . . billions of dollars in fraudulent mortgages, fraudulent RMBS, and fraudulent CDOs" (Ex. B at 9) and this alleged fraud "devastated the firm and shareholders, including Mr. Billington." (Ex. B at 10). It cites statements and actions by former ML & Co. executives and employees-including ML & Co.'s former CEOs Stanley O'Neal and John Thain, and its former CFO Jeffrey Edwards-as constituting the alleged fraud. As noted above, the allegations in the Amended Statement of Claim mirror allegations in shareholder and other investor actions against ML & Co. dating back to 2007. 

31. The Amended Statement of Claim asserts that as a result of ML & Co.'s alleged fraud, the Billington Trust suffered over $100 million in losses in its ML & Co. stock holdings. The Amended Statement of Claim asserts claims for fraud, breach of fiduciary duty, and RICO. It seeks compensatory and punitive damages, and treble damages under RICO.

Pages 8 - 10 of the Complaint

Defendants' Opposition to Arbitration Injunctions

In disputing Plaintiff's assertion that the FINRA Arbitration was not the proper forum, Defendants argued in their Merrill Lynch, Pierce, Fenner & Smith Incorporated, Plaintiff, v. Christina Billington as Successor Trustee for the James A. BIllington Trust; Steven Moreno; and Donald Straszheim, Defendants (Defendants' Memorandum in Opposition to Motion for a Preliminary Injunction Against Proceeding in FINRA Arbitration, United States District Court for the Central District of California, 17-CV-08150 / December 12, 2017), part, that:

[D]efendants who were its employees to hold their compensation in the form of MER common stock and options in brokerage accounts maintained at MLPF&S. Each Defendant's brokerage account had an arbitration clause requiring all disputes to be resolved at FINRA. 

Page 6 of Defendant's Memo in Opposition

CDCA Denies Injunction

In denying Plaintiff Merrill Lynch's Motion, the United States District Court for the Central District of California ("CDCA") found that Plaintiff had failed to establish any likelihood of success on the merits. Notwithstanding that ruling, CDCA was none too enamored with what it viewed as troubling aspects of Defendants' FINRA Arbitration Statements of Claim. Merrill Lynch, Pierce, Fenner & Smith Incorporated, Plaintiff, v. Christina Billington as Successor Trustee for the James A. BIllington Trust; Steven Moreno; and Donald Straszheim, Defendants (Court Decision, United States District Court for the Central District of California, 17-CV-08150 / March 5, 2018),
In characterizing the matter before it, the United States District Court for the Central District of California ("CDCA") states in part that:

Plaintiff Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Plaintiff" or "MLPFS") sues Defendants Christina Billington as Successor Trustee for the James A. Billington Trust, Steven Moreno, and Donald Straszheim (collectively "Defendants") for a declaratory judgment pursuant to 28 U.S.C. § 2201 and for injunctive relief under Fed. R. Civ. P. 65(a). See generally Complaint ("Compl."), Docket No. 1. MLPFS seeks a judicial determination that it has no obligation to participate in arbitration proceedings brought by Defendants before the Financial Industry Regulation Authority ("FINRA"), and an order enjoining the three ongoing FINRA Arbitrations initiated by Defendants against MLPFS. Id. . . .
Footnote 1:  The Complaint avers that: 

ML & Co. was, until 2008, a publicly traded company listed on the New York Stock Exchange under the ticker symbol "MER." ML & Co. was acquired by Bank of America Corporation ("BAC") in a merger that was consummated on January 1, 2009. Prior to the merger of ML & Co. into BAC, MLPF&S was a wholly owned subsidiary of ML & Co. At all relevant times, ML & Co. and MLPF&S were separate corporate entities. 

See Complaint at ¶ 13

Footnote 2: The Court would note that in the claims filed with FINRA, the Defendants have clearly (and arguably intentionally) obfuscated the distinctions between (and the conduct of) MLPFS and ML & Co., referring to both as "Merrill Lynch" without any differentiation. See e.g. Amended Statement of Claim filed in the Matter of Arbitration between Christina Billington v. Merrill Lynch, Pierce, Fenner & Smith, Inc., Case No. 17-01678, attached as Exhibit B to Complaint, Docket No. 1-2 at 6-10 of 38. However, given that pleading tactic, this Court cannot determine if in fact all of the germane allegations in the FINRA Claims only concern actions taken by nonparty ML & Co., not MLPFS.