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
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
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
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
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.
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