Arbitrators Deny Ex-Merrill Employee’s Big Stock-Decline Claim
(Adds comments from former broker’s lawyer that he expects to appeal the decision, and other details.)
A divided Finra arbitration panel has dismissed another retired Merrill Lynch employee’s bid to be reimbursed for the decline of his company stock during the financial crisis.John Gelbach waited too long to bring his case under the regulator’s version of the statute of limitations, two pubic arbitrators in Boca Raton, Fla., ruled in an unusually frankly worded award document posted Tuesday evening. A third arbitrator dissented from the opinion, but did not explain his reasoning or what part of the award he objected to.
“Claimant is a sophisticated investor and an experienced securities industry professional and worked for [Merrill] for many years,” the arbitrators wrote in explaining why they did not offer an extension of the claim period as an equitable remedy.
“Claimant was quite capable of assessing the regulatory and other risks to the value of Respondent’s stock after the dramatic events of the 2008 litigation involving subprime mortgages, the extensive publicity arising therefrom, and the widespread litigation brought against Respondent on account of those events.”
The decision follows another panel’s dismissal in March of a $100 million claim from the estate of former Merrill western region director James Billington on the same statute-of-limitation grounds. More than 70 other claims from former Merrill employees are pending, according to Michael Taaffe of Shumaker Loop & Kendrick, who represented Gelbach and many of the other claimants.
Taaffe said he will move for a rehearing by Finra or go to court to rehear or vacate the decision. The arbitrators erroneously allowed Merrill to withhold documents in prehearing discovery that would have shown firm executives dissembling about firm-specific wrongdoing that caused company shares to decline more steeply than the broader market, he said. They may also have violated Finra procedural rules by dismissing without unanimous consent, he added.
Gelbach worked at Merrill for more than 35 years, beginning as a retail broker in Cleveland in 1970 and retiring in 2007 after spending most of his career in institutional sales, according to Taafe. The retiree claimed that Merrill’s wrongdoing shaved about $8 million from his stock and option holdings, but did not recognize the company’s fraudulent behavior until Bank of America in 2014 announced an almost $17 billion settlement with the federal government, the lawyer said.
“He believed what Mother Merrill said about it all being due to market losses,” Taaffe said. “He was clearing drinking the Kool-Aid.”
A Merrill spokesman said he could not immediately comment on the decision.
Arbitration panels have granted about four of Merrill’s motions to dismiss former employees’ stock claims, and a few more in part, but denied about 20 such motions, Taaffe said. Other lawyers said that Tuesday’s dismissal is disturbing for the claimants, even though there is no precedent given to other decisions in Finra hearings.
“Finra arbitrators are reluctant to dismiss cases before arbitration hearings are held, and when they do it’s pretty rare to publish a stunning rebuke like the one here,” said Andrew Stoltmann, a plaintiffs’ lawyer in Chicago who is not involved in any of the Merrill stock-claim cases. “I can promise you that Merrill Lynch is going to use this as exhibit one in every motion they file to dismiss, even though there is no precedential value in Finra cases.”
Gelbach argued that his claim fell within the six-year Finra limit because it was filed in February 2018 and because damages caused by Merrill’s alleged mismanagement continued through 2014, according to the award statement. In addition to unspecified compensatory damages and disgorgement of Merrill’s alleged gains, he asked for treble damages under the RICO federal anti-racketeering law as well as attorneys’ fees.
“Claimant’s assertion that Respondent committed a continuing breach of its duty to him, by not acknowledging publicly its alleged wrongdoing, fails to state a valid claim for fraud,” the award statement said.
Merrill initially tried to obtain preliminary injunctions in federal courts that would have precluded arbitration of the dozens of claims, but lost that procedural battle.
Gelbach did not respond to a phone message left at residential phone numbers in Florida listed under his name.