A nasty arbitration between Merrill Lynch and two of its former brokers is continuing, despite a ruling last week ordering the firm to pay the representatives $10.2 million in a dispute over deferred compensation.
The big win for the brokers will spark similar claims, industry observers said, although the potential for Merrill to face more liability remains to be seen.
A three-person Financial Industry Regulatory Authority Inc. panel awarded former Merrill brokers Tamara Smolchek and Meri Ramazio $4.3 million and $875,000, respectively, in compensatory damage, plus another $5 million in total punitive damages and $100,000 for discovery abuse.
Merrill Lynch immediately filed a petition to vacate the ruling with the U.S. District Court for the Southern District of Florida.
“This decision is wrong and the amount of the award bears no relation to the damages at issue,” Merrill spokesman Bill Halldin said in a statement.
In its court petition, Merrill claims it never got a fair hearing and alleges bias on the part of the panel chairwoman, Bonnie Pearce of Boca Raton, Fla.
The firm claims that Ms. Pearce failed to disclose that her husband, Robert Pearce, is a plaintiff's attorney who has sued Merrill Lynch on behalf of brokers or customers in at least five cases.
In one of those cases, decided in 2005, the firm was ordered to pay just over $1 million to an investor who claimed Merrill's stock research was conflicted. In its court filing, Merrill cited a 2005 Palm Beach Post story quoting Mr. Pearce as saying: “Putting [Merrill] down the way I did was a highlight in my career.”
Ms. Pearce's arbitrator disclosure report lists her husband's employer as Robert Wayne Pearce PA, and notes that he has represented several financial services firms.
Merrill objects that Mr. Pearce's plaintiff's work was not listed.
In a separate disclosure statement, Ms. Pearce told the parties that she did not discuss her husband's cases with him.
But “there is every reason to believe that Ms. Pearce was aware of her husband's views on Merrill Lynch, particularly given the statements attributed to him in The Palm Beach Post,” Merrill's court petition states.
During proceedings in January, Merrill asked Finra to remove Ms. Pearce from the panel. Finra refused, the firm said in its petition.
Finra spokeswoman Michelle Ong declined to comment, citing the ongoing litigation.
“We think it's a good award, and we're confident the case will be upheld,” said Michael Taaffe, a partner with Shumaker Loop & Kendrick LLP who represented the brokers.
Ms. Pearce is “an experienced panel member” who made decisions jointly with the other arbitrators, Mr. Taaffe said. Her husband's work as a securities attorney was well-known and disclosed on record, he added.
Phone messages left for Mr. Pearce at his firm were not returned.
“SHAM COMMITTEE”
Ms. Smolchek and Ms. Ramazio sued Merrill for the deferred compensation they lost after leaving for Morgan Stanley's North Palm Beach, Fla. office in November 2008, two months after Bank of America Corp. announced it was buying Merrill.
In their arbitration claim, filed in October 2010, the brokers said they left due to uncertainty surrounding the impending merger. They argued that the change in control of the firm triggered vesting of their deferred pay.
In its answer to the claim, Merrill said the brokers “merely used a change of control as an excuse to leave Merrill Lynch to join Morgan Stanley and receive lucrative upfront payments to do so.”
Last week, the arbitration panel gave the brokers the deferred pay they asked for and blasted Merrill for running a “systemic fraudulent scheme to deprive claimants of their rights” under the deferred-compensation plans.
The panel said a Merrill Lynch committee that determines whether to vest departing brokers in their deferred pay was “a sham committee that did nothing more than rubber-stamp denials.”
Merrill had never approved a request for vesting despite the firm's own “numerous ... analyses and anticipated turnover projections that indicated anywhere from hundreds of millions to several billion dollars in potential liability,” the award said.
Ms. Pearce, a human resources consultant, “understands how these [vesting decisions] are supposed to work,” Mr. Taaffe said, and ruled accordingly.SUBHEAD
The finding that Merrill had wrongly denied claims for deferred compensation could help other plaintiffs, said David Gehn, a partner at Gusrae Kaplan Bruno & Nusbaum PLLC, who represents other brokers with similar claims against Merrill.
Arbitration awards have no precedential value, but “to have in writing an award with $5 million in punitive damages, specifically on the denial of [deferred compensation], should be quite a concern for Merrill Lynch,” he said.
“The decision here is radically different than findings of similar” cases, Mr. Halldin said in an interview, declining to comment further.
Brokers who left Merrill several years ago and did not take a retention package from Bank of America probably have stronger cases, said Steven J. Insel, a lawyer at Elkins Kalt Weintraub Reuben Gartside LLP, who said the retention deal eliminated some accelerated vesting provisions.
Mr. Taaffe apparently “discovered documents that made Merrill Lynch look bad” in terms of “twisting arms ... to get people to sign the retention,” Mr. Insel added, which could potentially strengthen some cases.
It is not known how many cases concerning Merrill's deferred-compensation plans have been heard or settled, but observers said the firm has won some and lost some.
Mr. Taaffe is believed to have the most cases and claims to have won the first case based on the change-of-control argument, in 2010. That case, in which he recovered $1.2 million for a team of former Merrill representatives in Fort Lauderdale, Fla., “substantiated the basis for bringing the claims,” Mr. Gehn said, and prompted more brokers to seek payment.
The latest case “will definitely spark more claims,” said Larry Moy, an employment lawyer and partner at Outten Golden LLP.
djamieson@investmentnews.com
