As the latest in a series of large fines levied against the nation’s few remaining wirehouse firms in early 2012, FINRA announced on Wednesday, January 25, that it fined Merill Lynch, Pierce, Fenner & Smith $1 million for refusing to arbitrate promissory note/retention bonus disputes with its registered representative employees.
According to FINRA, after merging with Bank of America in early 2009, Merrill Lynch implemented a program known as the “Advisor Transition Program” (ATP). Through the program, the firm distributed a whopping $2.8 billion in retention “bonuses” to approximately 5,000 high-producing registered representatives to entice them to stay with the firm in what was then a tumultuous time in the securities industry. But as is typically the case with these “golden handcuff” bonuses, there was a catch.
The bonuses were tied to promissory notes, the balance of which would be forgiven over a period of time (typically seven years) as long as the registered representatives remained with the firm and paid taxes due on the forgiven amounts. If, however, a registered representative filed for bankruptcy, became insolvent, failed to make a payment, or terminated their employment with Merrill Lynch for any reason before the total “bonus” amount was repaid, all outstanding principal and interest immediately became due and payable. Most relevant to FINRA’s investigation, the promissory notes also contained a venue clause stating that “any actions regarding the [n]ote, including actions to recover amounts due under this [n]note, shall be brought solely in the Supreme Court of the State of New York in New York County.” New York law significantly limits a registered representative’s ability to assert counterclaims in a promissory note dispute with their employer.
In 2009, numerous Merrill Lynch registered representatives either left the firm or were terminated, prompting Merrill Lynch to file over 90 actions in New York court to collect amounts allegedly due on the brokers’ promissory notes. By doing so, FINRA concluded the firm violated FINRA Rules 2010 and 13200(a), which require member firms to observe “high standards of commercial honor” and generally require all disputes between a firm and its employees to be arbitrated before FINRA. Merrill Lynch neither admitted nor denied FINRA’s findings but agreed to pay a $1 million fine and to refrain from bringing further note collection actions in New York state court.
If you have a promissory note or retention bonus dispute with your firm, have been offered an up-front, forgivable note or if you are considering a transition from one firm to the other, contact our managing partner, Erwin Shustak, at 619.696.9500, to discuss your options. More information about up-front, forgivable notes and broker transitioning can be found at our web site, www.shufirm.com.
FINRA started the new year off by levying a $725,000.00 fine against Citigroup Global Markets, Inc., for failing to disclose potential conflicts of interest in certain research reports the firm published from January 2007 through March 2010. According to FINRA, Citigroup (a) owned a 1% or greater interest in, or (b) received investment banking and other revenue from several companies identified in its research reports, but did not disclose these fact to its customers.
According to Brad Bennett, FINRA’s Chief of Enforcement, “Firms need to provide investors with full and accurage information so they will be able to take it into consideration before making an investment decision.” Citigroup neither admitted nor denied FINRA’s allegations, but agreed to pay $725,000.00 to settle the charges.
Broker-dealers not only have a duty not to misrepresent material facts, but also to disclose all relevant, material information to their customers when recommending an investment. Failures to disclose material information, known as omissions, may give rise to broker-dealer liability. If you have suffered losses as a result of a broker-dealer’s failure to disclose or other misconduct,contact our firm’s managing partner, Erwin Shustak, at (619) 696-9500 orshustak@shufirm.com. Our firm routinely handles securities and investment disputes involving misrepresentations, omissions and other broker misconduct.
Investment Placement Group (IPG), an independent brokerage firm headquartered in downtown San Diego, agreed in late December to pay the Securities and Exchange Commission (SEC) approximately $4 million in penalties to settle charges that the firm failed to supervise Aurelio Rodriguez, one of its former registered representatives.
As described in the SEC’s December 2011 Order, “[f]rom approximately January through November 2008 (“relevant period”), while Rodriguez was associated with IPG, he perpetrated a fraudulent interpositioning scheme involving a Mexican investment adviser, InvesTrust, and utilizing a separate Mexican brokerage firm. Rodriguez, acting in concert with InvesTrust, violated Section 17(a) of the Securities Act of 1933 (“Securities Act”) and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by needlessly interposing the Mexican brokerage firm into securities transactions between IPG and InvesTrust’s institutional clients, including four Mexican pension funds. As a result of Rodriguez’s misconduct, the pension funds paid approximately $65 million more for certain credit-linked notes than they would have had the Mexican brokerage firm not been unnecessarily interposed as a “middleman.” IPG and Rodriguez each received more than $6 million as a result of Rodriguez’s fraudulent scheme.”
IPG neither admitted nor denied the SEC’s allegations but agreed to pay more than $4 million in penalties to settle the charges. The firm also agreed to revise its policies, procedures and systems governing the detection and prevention of interpositioning violations and other fraudulent activity.
If you believe you have been damaged as a result of a broker dealer’s failure to supervise or negligent supervision of its registered representatives, please contact our firm’s managing partner, Erwin Shustak, at 888-748-8748 or shustak@shufirm.com.
