For those of you who thought that U-5 defamation was a dead issue, a New York Stock Exchange arbitration panel has awarded three Merrill Lynch brokers $14 million in damages for defamation. They also denied the firm's claims for $2 million in forgiveable loans.
According to an article in the Wall Street Journal, the action arose from the Millennium trading scandal. Merrill fired the brokers for accepting market timing trades and violating company policy. The brokers claimed that Merrill endorsed their trading strategy.
Another interesting part of the story is that the brokers were employed in the Fort Lee New Jersey office of Merrill. Merrill was fined 13.5 million dollars by regulators for failing to supervise its brokers "in New Jersey" according to the Wall Street Journal.
The award is a significant, and very public, reminder to firms that they need to be very careful what they do and say when the terminate brokers. Firms are certainly in a tough spot - if they don't disclose enough, they run the risk of a regulatory review for incomplete U-5s. If they say too much, they run the risk of a defamation claim.
But this story does not appear to be about a firm finding itself between a rock and a hard place. Reading between the lines, it appears that the firm attempted to use the brokers as scapegoats to save itself and perhaps more senior executives. Claim ignorance, fire the brokers and tell the regulators that we did all we could, and took immediate action. Firms then hope that the regulators will overlook the fact that the underlying conduct was going on for years, with the knowledge of the firm, and the firm, not the brokers, were the prime beneficiaries of that conduct.
If that was the case, the strategy backfired...to the tune of $27 million dollars in damages and fines.