Merrill Lynch Fined $1 Million for Bonus Clawbacksby BEN PROTESS, dealbook.nytimes.com
January 25th 2012
The big bonuses doled out at Merrill Lynch during the height of the financial crisis have once again reared their ugly head.
Merrill Lynch agreed on Wednesday to pay regulators $1 million to settle accusations that it thwarted rules for clawing back the compensation. The bonuses were tied to the firm’s merger with Bank of America, which came in early 2009.
The Financial Industry Regulatory Authority, Wall Street’s self-regulator, sanctioned the firm for requiring former highly paid brokers to settle disputes over “retention bonuses” in New York State court. Under the authority’s rules, brokerage firms are supposed to allow employees access to arbitration panels, rather than state courts, which are less-friendly turf for employees.
“Merrill Lynch specifically designed this bonus program to bypass the authority’s rule requiring firms to arbitrate disputes with employees, and purposefully filed expedited collection actions in New York state courts and denied those registered representatives a forum to assert counterclaims,” Brad Bennett, the authority’s enforcement chief, said in a statement.
Bonuses awarded at Merrill Lynch ahead of the Bank of America deal have been the subject of much regulatory scrutiny. In 2010, Bank of America paid the Securities and Exchange Commission $150 million to settle accusations that it hid the bonuses from shareholders before the deal closed.
But in the latest case, the former Merrill brokers make for unlikely victims.
Merrill awarded $2.8 billion in bonuses, set up as loans that would come due if an employee departed, to more than 5,000 “high-producing” brokers to keep them happy during the tumult of the Bank of America takeover, according to the Financial Industry Regulatory Authority. Soon after, several brokers fled the firm, while stiffing Merrill for the cash owed under the loan.
“It’s important to remember that legal action only occurs when a former employee doesn’t repay their loan as they had agreed to do,” a Merrill Lynch spokesman, Bill Haldin, said in the statement. “Given that well over 90 percent of financial advisers who participated in the program are still with us, repayment problems haven’t been a widespread issue.”
Merrill Lynch filed nearly 100 cases against their former brokers in New York State court, a breach of the authority’s rules. New York State court, Finra noted, “greatly limits the ability of defendants to assert counterclaims in such actions.”
Merrill Lynch neither admitted nor denied the charges, but consented to Finra’s enforcement action and fine.
The Financial Industry Regulatory Authority also accused Merrill Lynch of drafting the bonus program in a way that obscured that the bonuses came from the firm. Instead, Merrill Lynch structured it to seem that the bonuses stemmed from “MLIFI,” an affiliate not under the authority’s jurisdiction.
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