Merrill Lynch has apparently pulled a fast one on unsuspecting brokers who thought they could resolve promissory note disputes with the firm through FINRA arbitration ? it (cleverly) issued the notes through a non-member of FINRA and is now taking the brokers to court in New York, where the courts are generally business-friendly and inclined to grant summary judgment to promissory note holders. This according to Dan Jamieson in his recent article in InvestmentNews, “Merrill avoids arbitration in loan cases.”
The background is as follows: Merrill offered recruitment bonuses of up to 100% of annual production to former Bank of America brokers. Three quarters of the bonus was paid up-front, but as a loan, subject to a seven-year note under which the broker is obligated to repay the loan upon separation from the firm. A portion of the loan (presumably 1/7) is forgiven each year.
The loans were made by Merrill Lynch International Finance Inc. (“MLIF”), which is not a broker dealer, and not a FINRA member. Thus, the brokers owe the money to MLIF and MLIF (not Merrill Lynch & Co.) has the right to seek redress if the broker leaves Merrill without paying any amount due under the terms of the note. Due to the fine print in account agreements and Form U-4s, customers and brokers must typically take their disputes with FINRA member firms to arbitration rather than court. Likewise, FINRA rules require its members (like Merrill Lynch & Co.) to arbitrate all disputes with its brokers and customers that arise out of their business.
But in this case, according to observers quoted in the article, Merrill Lynch deliberately set up the loans and notes to be able to go to court to take advantage of the business-friendly New York courts that, more often than not, quickly hand judgments to those seeking to recover on a written promissory note. Brokers are asking the court to compel Merrill Lynch to arbitrate the disputes, and Merrill Lynch is contesting those motions. On the other hand, let a customer try to take Merrill Lynch or any brokerage firm to court, and they vigorously seek to have the case dismissed and sent to FINRA arbitration.
Thus, when Merrill Lynch perceives an advantage in going to court, it forces potential counter-parties to go to court. When it perceives a disadvantage in going to court ? say, from having a customer’s claim decided by a jury rather than an arbitration panel that typically contains an individual who is affiliated with the securities industry ? it uses pre-dispute arbitration agreements to prevent the customer from taking them to court. This type of sharp gamesmanship by Merrill Lynch and all other brokerage firms is another example of the inherent and unconscionable unfairness of allowing the brokerage industry to require that customers (often unknowingly) waive their right to take their claims against brokerage firms to court. Claimants should be allowed to decide whether they wish to pursue their claims in court or in arbitration. The forum should not be limited to a brokerage firm’s choice based on its self-interest.