Merrill Lynch Lawsuit Shows Fired Brokers Can Use Protocol Rules Too, Lawyers Say
Brokers fired from their broker-dealer firms have the right to exercise their rights under the Protocol for Broker Recruiting, according to lawyers who have represented both sides in employment disputes.
There’s nothing in the broker protocol that says terminated brokers can’t exercise their protocol rights, nor is there anything that prescribes the timing of exercising those rights, according to Dennis Concilla, Columbus, Ohio-based head of Carlile, Patchen & Murphy’s securities litigation and regulation practice group.
On July 25, Merrill Lynch filed a motion for a temporary restraining order against its former advisors Jason Hostetler and Tina Migge before the U.S. District Court for the Northern District of Ohio. Merrill Lynch accused the advisors of breach of contract, misappropriation of trade secrets, breach of duty of loyalty and unfair competition.
Hostetler was fired on April 6 for “conduct inconsistent with Merrill Lynch’s standards related to personal trading, resulting in the loss of manager’s confidence,” according to the complaint filed by the firm. Hostetler denies he was “piggybacking” his own personal securities trades on those of one of his clients and says the firm never presented proof of the accusation, according to the defendants’ opposition filing in court.
Migge resigned from the firm on May 14. Both Hostetler and Migge are currently registered with Stratos Wealth Advisors, also in Canton, Ohio.
Merrill Lynch claimed that as of July 25, the firm received 140 requests from accounts representing 44 households serviced by Hostetler and Migge to be transferred to their new firm. The accounts represent $26.5 million in assets and $265,206 in annual commissions that Merrill Lynch says it lost due to the transfers.
That case eventually ended in a settlement, which led to a stipulated TRO issued on June 30. The order said the defendants can transmit a formal notice that the industry commonly refers to as a tombstone letter to clients serviced by Merrill Lynch’s PHH Wealth Management Group, where Hostetler and Migge previously worked. The order added that the letter won’t be considered an act of solicitation.
Reacting to that case, in which he was not involved, Concilla says Hostetler’s termination put him at a disadvantage in terms of exercising his protocol rights.
Hostetler didn’t have the ability to submit a protocol-compliant client information list because he was allegedly fired over the phone while in his car on his way to a business appointment and was told not to return to the office, according to the opposition filing and Scott Matasar, Hostetler’s Cleveland, Ohio-based lawyer in the TRO case.
“First of all, you have the issue of the main broker having been terminated for cause and so he didn’t have a clear shot at using the protocol,” Concilla says. “On a practical basis, he was terminated while he was driving a car. He would have had no way of preparing the list or to do the things he needed to do in order to enforce the protocol.”
Concilla says he has had broker clients who were terminated in “similar situations” but were able to “come up with a list the best they could” to enact the protocol. “Sometimes it works and sometimes it doesn’t,” he adds.
“Merrill Lynch and other [broker-dealer firms] would take the view – and it is an incorrect view – that you can’t use the protocol if you were terminated,” Concilla says. “I would say, well, I wish they had jotted that down in the margins [of the protocol agreement]. There’s nothing in the document that says that.”
Concilla believes that “if you have the ability to create the list, produce the list, follow the protocol, you should be able to do it.”
And there should be no restriction on the timing of creating this list, he says.
“There’s nothing in the protocol that dictates the timing of submitting the list,” Concilla says. “As a practical matter, the whole purpose of that device when that was created was to allow the branch manager [of the broker-dealer firm] to get a head start. If you hand [over] a list before you walk out, and the list had all the information, the branch manager could easily distribute that to the other brokers that are left for making phone calls.”
The other purpose of the protocol is to let the branch manager see if the broker is claiming to have a relationship with a client that he/she didn’t service in the past, Concilla adds.
For Matasar, the stipulated TRO is the case versus Hostetler was a “recognition” that Hostetler “was terminated in such a way that he was deprived of his ability to exercise his rights under the Protocol for Broker Recruiting because he was terminated while in his car, driving to an appointment, so therefore could not turn in any list.”
That stipulated TRO effectively restored Hostetler’s protocol rights, he says.
Merrill Lynch declined to comment for this article.