On May 6, 2011, after an eight-day hearing, an arbitration panel of the Financial Industry Regulatory Authority, Inc. (“FINRA”), sitting in Philadelphia, Pennsylvania, held that a discharged broker of Bank of America Corp. (“BAC”)’s Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch,” the “brokerage firm,” or the “firm”) need not pay Merrill Lynch $3.3 million due on a forgivable loan. Merrill Lynch, Pierce, Fenner & Smith Inc. v. Connell, FINRA Arbitration No. 10-03486 (May 6, 2011). Further, the FINRA arbitration panel held Merrill Lynch liable for, and directed the brokerage firm to pay to the respondent broker, compensatory damages of $476,500, representing a loan forgiveness payment roughly equal to one-seventh of the $3.3 million loan. If the broker had remained in Merrill Lynch’s employ through a date just two days after the date on which Merrill fired the broker, the promissory note would have required the brokerage firm to make that loan forgiveness payment to the broker.
In Connell, claimant/counter-respondent Merrill Lynch, Pierce, Fenner & Smith Incorporated had made to a broker, respondent/counterclaimant Robert Connell (“Mr. Connell,” the “respondent broker,” or the “broker”), a forgivable loan of $3,300,000 when he began employment with the brokerage firm in June 2009. Also in June 2009, the respondent broker had signed a promissory note apparently stating that if Merrill Lynch terminated Mr. Connell’s employment within a specified period for any reason, the balance owing on the forgivable loan would immediately become payable to the brokerage firm. The promissory note apparently required Merrill Lynch to make loan forgiveness payments to Mr. Connell of $476,500 on each of the first seven anniversaries of the broker’s June 2009 start date, provided that Mr. Connell remained in Merrill’s employ. That is, the promissory note evidently required Merrill Lynch to forgive, in equal annual installments over seven years, Merrill’s $3.3 million loan to Mr. Connell, as long as Merrill continued to employ the broker.
According to Mr. Connell’s counsel, in June 2010 — only two days before Merrill Lynch was required to forgive the first $476,500 of Mr. Connell’s promissory note — Merrill fired Mr. Connell. Mr. Connell’s attorney states that Merrill accused Mr. Connell of improperly bringing client information to the brokerage firm from Mr. Connell’s former firm Smith Barney, a violation of the Protocol for Broker Recruiting.
Mr. Connell’s counsel hypothesizes that Merrill fired Mr. Connell because the brokerage firm suffered “buyer’s remorse” after giving the broker such a large forgivable loan. Further, speculates Mr. Connell’s attorney, Merrill may have desired to fire Mr. Connell, but to avoid forgiving the promissory note, and to keep Mr. Connell’s clients as well as the team of brokers that Connell brought with him from Smith Barney.
In any event, as stated, the FINRA arbitration panel held that Mr. Connell need not pay Merrill Lynch the $3.3 million due on the promissory note. Further, the arbitration panel ordered Merrill to pay to Mr. Connell compensatory damages of $476,500, representing the loan forgiveness payment that the promissory note would’ve required the brokerage firm to make to Mr. Connell if Connell had remained on Merrill’s payroll through a date just two days after the date on which Merrill fired the broker. Moreover, the FINRA arbitrators directed Merrill to reimburse Mr. Connell for $311,142 of attorneys’ fees and costs which the broker incurred in the proceeding.
As is typical in FINRA arbitration proceedings, the Connell arbitration panel did not explain the reasons for its award. It is submitted that the Connell award stands for a rule that, where a brokerage firm fires a broker for the purpose of precluding the firm from being required to make a payment to the broker representing a portion of the balance owed by the broker to the firm under a promissory note, a FINRA arbitration panel (i) may cancel the broker’s debt under the promissory note and (ii), despite the panel’s cancellation of the note, may require the firm to make the precluded payment to the broker.
Promissory Note Cases
The dispute arbitrated in Connell — concerning “transitional compensation” payments to a broker whom the firm has fired within a predetermined period of time — is the type of dispute most frequently arbitrated before FINRA between brokerage firms and brokers. These disputes are called promissory note, forgivable loan, recruiting bonus, or up-front bonus cases.
In the securities industry, brokerage firms frequently offer account executives transitional compensation to smooth the account executives’ lateral moves to those firms. A firm’s reasons for offering such compensation are to convince the account executive to join the firm and to make sure that the executive will not receive a windfall if he or she leaves the new firm soon after joining. As a result, the forgivable loan or up-front bonus provision of a broker’s agreement of employment typically states that if the firm fires the broker within a specified period for any reason, or if the broker voluntarily quits the firm, the balance owing on the loan immediately becomes payable to the firm.
If the terminated broker does not promptly repay the loan, the brokerage firm may bring a FINRA arbitration against the broker to recover the amount outstanding. In such a scenario, the terminated broker should retain skillful counsel to negotiate with the brokerage firm and/or to aggressively defend the broker in any promissory note arbitration.
If you are a securities industry professional residing in the New York City area, and the brokerage firm which formerly employed you demands that you repay monies due under a promissory note, call Attorney David S. Rich at (212) 209-3972.