Securities Industry Commentator by Bill Singer Esq

April 2, 2020

[In]Securities Guest Blog: Breathless by Aegis Frumento Esq ( Blog)

Wayne Bland, Danuta Durkiewicz, David Bowles, and Adam Reyes, individually and on behalf of all other similarly situated, Plaintiffs, v. Edward D. Jones & Co., L.P. and The Jones Financial Companies, L.L.L.P, Defendants (Opinion)

Delila Uwasomba, Plaintiff, v. Merrill Lynch, Pierce, Fenner & Smith, Inc., Defendant (Opinion)
Years ago, in anticipation of a pandemic that we all knew (or should have known) was coming, there were calls to build a stockpile of inexpensive ventilators that could be deployed immediately. Those plans moved forward. The bids came in. Deals were struck; however, the development of a $3,000 ventilator was sacrificed to maximize the profits of a large corporation, notes Aegis Frumento, Esq.  In retrospect, not only a sad bit of math but a cost-benefits analysis that will cost lives.

Compliments to FINRA on an excellent update on its developing pandemic policies. As set forth on FINRA's website:
The new coronavirus that causes COVID-19 has rapidly changed the way U.S. broker-dealers must conduct business as states implement various shelter-in-place and stay-at-home orders, forcing workers remote. On this episode, we talk to FINRA's Chief Legal Officer and Head of Member Supervision to learn how FINRA is adapting its operations and providing important regulatory relief.
The United States District Court for the District of Maine entered Summary Judgment on all claims in the SEC's Complaint against Jeffrey E. Wall and his company, The Lighthouse Events LLC. Wall and Lighthouse are enjoined from violating the antifraud and registration provisions of the federal securities laws; and ordered to jointly/severally pay $1,589,815 in disgorgement; $202,056 in interest; civil penalties of$1,589,815 against Wall and $1,589,815 against Lighthouse.As set forth in part in the SEC Release:

The Commission charged Wall and Lighthouse in April 2019 with operating an egregious community-based financial fraud related to Christian music concerts and festivals. The judgment finds Wall and Lighthouse liable for fraudulently raising more than $3 million in unregistered offerings from approximately 145 investors, many of whom shared Wall's religious views. Wall had promised investors that their funds would be used solely to promote and host Christian music concerts and festivals and that their investments were "secured" and "guaranteed." In reality, Wall and Lighthouse used investor funds for a variety of other expenses, including payment of Lighthouse's existing debt and payments to earlier investors.
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Jacqueline Jacobsen submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Jacqueline Jacobsen entered the industry in 1994, and by 2009, she was associated with FINRA member firm Morgan Stanley. The AWC alleges that Jacqueline Jacobsen "does not have any disciplinary history with the Securities and Exchange Commission, any state securities regulators, FINRA, or any other self-regulatory organization." In accordance with the terms of the AWC, FINRA found that Jacqueline Jacobsen had violated FINRA Rule 2010; and the self regulator imposed upon her a $5,000 deferred fine and a six-month suspension from association with any FINRA member firm in any capacity. As set forth in part in the AWC, from 2009 to 2017, Jacobsen participated in Morgan Stanley's "Alternative Flexible Grid Program" ("AFG"). which allowed the firm's registered representatives to:

elect to reduce their compensation by a certain amount so that those funds are allocated to the registered representatives' AFG accounts. Funds in an AFG account can only be used to pay support staff directly from the AFG account through the Firm compensation system as regular compensation or as a discretionary bonus, or to reimburse the registered representative for approved business-related expenses such as client entertainment, client gifts, and business-related travel. To use the funds, registered representatives must ask the Firm to disburse the funds for one of these purposes. 

During 2016, in order to participate in the AFG program, Jacobsen acknowledged to the Firm in writing that she would use the funds only for those specified business-related expenses. Jacobsen also acknowledged that any unused funds set aside for 2016 in her AFG account would be forfeited to the Firm if they were not disbursed in accordance with Firm policy by the end of January 2017. 

At the end of 2016, Jacobsen requested that the Firm disburse $3,221.91, the amount remaining in Jacobsen's AFG account, as a year-end bonus to a Client Service Associate ("CSA") at the Firm. Contrary to Jacobsen's representations to the Firm, however, and without notice to or permission from the Firm, Jacobsen asked the CSA to give approximately $1,200 of the AFG bonus funds to Jacobsen. Jacobsen did not use these funds for any approved business-related purpose.
This matter is a Collective/Class Action filed by Plaintiffs, who are former Financial Advisors of Defendants who participated in the firm's Financial Advisor Training Program and many of their claims arise in connection with a provision in the Financial Advisor Employment Agreement that references training costs reimbursements (the "TCRP"):

Upon execution of this Agreement and receipt of your can sell date from Edward Jones, you will be a financial advisor of Edward Jones. If, within three (3) years after receipt of your can sell date, your employment with Edward Jones is terminated by you or by Edward Jones, you maintain registration of your license with FINRA and accept employment with any entity as either an employee or independent contractor engaged in the sale of securities and/or insurance business, you agree to reimburse Edward Jones the reasonable cost of the training Edward Jones has provided you including, but not limited to, the cost of the selection and hiring. * * * You agree that the reimbursable amount bears a reasonable relationship to the computed damages Edward Jones would suffer from a breach by you and that Edward Jones will suffer demonstrable loss as a result of your breach. The amount you agree to reimburse Edward Jones is $ 75,000.00. There shall be no reduction in the amount of training costs owed by you in the event your employment is terminated during the first year of service as a financial advisor of Edward Jones. This obligation shall be reduced by $ 9,375.00 for each full quarter year of service beginning the thirteenth month of your employment as a financial advisor of Edward Jones. You must be employed by Edward Jones for each full quarter year in order to have your training cost obligation reduced according to the provisions of this paragraph.  

As set forth in the NDIL Syllabus:

Plaintiffs Wayne Bland, Danuta Durkiewicz, David Bowles, and Adam Reyes ("Plaintiffs") filed this putative collective and class action against Defendants Edward D. Jones & Co., L.P. and The Jones Financial Companies, L.L.L.P.; alleging violations of the Fair Labor Standards Act, 29 U.S.C. § 201 et seq. (Count I) and several Illinois and Missouri state laws. Currently before the Court is Defendants' motion to dismiss [83] Plaintiffs' Second Amended Class and Collective Action Complaint [79]. For the reasons stated below, Defendants' motion to dismiss [83] is granted in part and denied in part. The case is set for further status on May 13, 2020 at 9:00 a.m. Counsel are directed to file a joint status report, including a discovery plan and a statement of whether any settlement talks have occurred and whether the parties request an early settlement conference, no later than May 8, 2020. 

In their Amended Complaint, Plaintiffs generally alleged in part that:

1. Edward Jones recruits new trainee brokers, called Financial Advisor ("FA") Trainees, with promises of extensive training and high pay. However, the Firm provides no meaningful training and denies FA Trainees the minimum and overtime wages required by federal and state law. Upon hiring, Edward Jones forces all FA Trainees to sign unlawful contracts agreeing to pay up to $75,000 in so-called "training costs" if they leave the Firm for any reason, as most will be forced to do, but continue selling securities or insurance products within three years after the Firm deems they "can sell." Edward Jones knows that a majority of the FA Trainees it recruits will not survive the three-year "training cost" period, but does not disclose this to its new hires. FA Trainees not directly fired are forced out by the Firm's high pressure sales requirements and diminishing pay scale, intentionally designed to force advisors to sell or leave, while Edward Jones retains the clients, assets, and fees the FA Trainees have developed for the Firm.1 

2. The Firm's limited training consists largely of high pressure sales tactics and a directive to sell to clients the financial products of "preferred product partners," who kick back a portion of their (often high) fees to the Firm. FA Trainees who resist Edward Jones's pressure to push these products on their clients in order to boost the Firm's revenues typically find themselves unable to meet their production goals and are forced out of the Firm. 

3. As a result, and by design, most FA Trainees will owe Edward Jones a significant portion of their pay as so-called "training costs," despite having received no meaningful training. Armed with the leverage and threat of substantial "training costs" debt if they leave, Edward Jones forces FA Trainees to work long hours, fails properly to record or pay them for hours and overtime worked, and misclassifies FA Trainees as exempt from overtime requirements after the initial training period. 

4. Edward Jones's practice of forcing FA Trainees to pay purported training costs and intentionally denying them minimum wages and overtime compensation violates federal and state wage and hour laws, including by failing to pay wages "free and clear. On behalf of themselves and other Edward Jones FA Trainees, Plaintiffs seek an end to Defendants' unlawful practices and fair relief for class members.  
= = = = =
Footnote 1: As used herein, "FA Trainees" includes Edward Jones financial advisors from hire date through the three-year "training cost" period. 

In addition to Plaintiffs' characterizations in their Amended Complaint, the Court offered further background:

New Financial Advisors, in contrast to Trainees, were salaried and classified as exempt, and therefore were not overtime eligible.4 [Id., ¶ 41-42.] Plaintiffs allege having worked 80-hour weeks as New Financial Advisors. [Id., ¶ 40.] Even after achieving can-sell status, New Financial Advisors still spent their days soliciting door-to-door and fulfilling clerical duties, such as inputting client contact information. [Id., ¶¶ 38-39, 152.] New Financial Advisors did not have their own offices, and therefore worked out of their homes and public places. [Id., ¶ 39.] 

Plaintiffs allege that they were extremely circumscribed in the financial advice they could provide to clients. They claim not to have received sufficient training regarding financial advising and Defendants' products to independently render advice. [Id., ¶ 43.] Instead, they used Defendants' wealth-balancing computer software, which spits out recommendations and investment options based on a client's preferences. [Id., ¶¶ 43, 84, 156] From there, New Financial Advisors are instructed to sell one of a few "preferred products," which generate large revenues for Defendants. [Id., ¶ 43] When Plaintiffs had questions about financial products, they were instructed to refer to the wholesalers' recommendations and descriptions. [Id.] For example, Bland was told to stick to recommending one of three products-one each for low, medium, and highrisk investors. [Id., ¶ 81.] Later, he was told to push a single financial product on all of his prospective clients. [Id., ¶ 83.] Reyes was instructed that certain classes of products are interchangeable, and he could more-or-less sell them willy-nilly. [Id., ¶ 153.] Defendants oversaw Plaintiffs' sales, and chided them when they sold "non-preferred products." [Id., ¶ 43] 

The Plaintiffs all allege to have been forced out. After Plaintiffs left, each received a letter demanding repayment of the entire $75,000 training fee. Basically, Plaintiffs allege that these five figure penalties are bogus, given that they received meagre training and acquired limited wealth management skills. [Id., ¶¶ 44-59.] Plaintiffs allege that Defendants fired off threatening letters before investigating whether they in fact are violating the TCRP by selling securities for another firm. [Id., ¶ 55]. Moreover, Plaintiffs have identified four instances in the past fifteen years in which Defendants arbitrated the TCRP with former brokers. [Id., ¶ 56.]

Pages 5 - 6 of the NDIL Memorandum

Bill Singer's Comment:

For the record, I hate, I detest, and I despise not only Trainee Fees but the very concept of a brokerage firm being able to recoup a portion of its cost in preparing trainees to become registered.  It strikes me as having the same compelling rationale as McDonald's suing to recoup its Hamburger University training fees if a graduate of their program jumps ship for Wendy's or Burger King. Frankly, I'm almost positive that an individual seeking a career in restaurant management obtains far more of value from McDonald's Hamburger University than most Wall Street trainees obtain from their so-called in-house training. I trust my feelings on this subject are clear?

Admittedly, there may be appropriate circumstances of gross bad faith by the trainee in which reimbursement of the reasonable value of the training may be fair.  In such circumstances, I would not be adverse to awarding the reasonable value of the training but rarely, if ever, the liquidated damages sought by the former employer. In most of these cases, the former brokerage employer is seeking to recoup Trainee Fees that exceed the cost of a year's worth of Ivy League college.  And for what?  Learning how to push house product?  Learning how to overcome a customer's objections?  And, puhlease, don't start with me - I used to have a Series 7 and a Series 63, and I'm a 38-year industry veteran. I know all too well what is taught during these training programs. It ain't worth no $75,000.

Merrill Lynch Wins Summary Judgment in Nigerian Discrimination Case.
Delila Uwasomba, Plaintiff, v. Merrill Lynch, Pierce, Fenner & Smith, Inc., Defendant (Memorandum Opinion, United States District Court for the District of Maryland, 18-CV-2520)
In 2016, DeLililia Uwasomba applied to become a Preferred Transition Specialist Trinee with Merrill Lynch, and during her interviews, she disclosed that she was Nigerian. Upon being extended a conditional job offer, Uwasomba was warned not to give notice to her employer because she still needed to pass Merrill Lynch's background check. As noted in the DMD Memorandum:

Ultimately, the Investigations Group discovered that Uwasomba had been convicted of petit larceny in the Chesterfield Circuit Court in Virginia in February 2008 and received a sentence of 12 months and 4 days in jail, with 12 months suspended. (Linville Dec. ¶ 5.) Based on this discovery, Uwasomba's background check was deemed unsatisfactory. (Id.) On December 7, 2016, the Investigations Group sent Uwasomba a letter informing her of the results of her background check. (12/07/2016 Letter, ECF No. 7.) 

Merrill Lynch provided Uwasomba with an opportunity to contest the background check determination. The December 7, 2016 letter informed Uwasomba that she could submit additional information within seven days to clarify or correct the results of the investigation. (Id.) Uwasomba's case was subsequently assigned to Appeals Manager Angela Linville. (Linville Decl. ¶ 9.) Linville contacted Uwasomba and informed her that FINRA rules precluded her from working as a Preferred Transition Specialist Trainee. (Id. ¶ 10.) Linville further explained that Uwasomba would be disqualified from any position at Merrill Lynch unless she could demonstrate that she met the de minimis exception under the FDIA; in other words, that she spent three days or fewer in jail. (Id. ¶ 11.) In an effort to prove that she had served fewer than four days in jail, Uwasomba visited the Chesterfield Circuit Court in Virginia to obtain records related to her incarceration. (Pl.'s Dep. 188:4-12.) The Court records indicated exactly what the background investigation had uncovered: that Uwasomba had served four days in prison for petit larceny. (Id. 188:19-189:17.) Uwasomba ultimately did not submit to Merrill Lynch or Linville any documents relevant to her conviction and sentence. (Pl.'s Dep. 189:2-9.)

At Pages 4 - 5 of the DMD Memorandum

During a conversation following the firm's declination of hiring Uwasomba alleged that a Corporate Recruiter:

"made statements about Nigerians and fraud." (Id. 212:10-13.) At her deposition, Uwasomba repeatedly testified that she could not recall Madden's words with any greater specificity. (See Pl.'s Dep. 212:9 ("I can't remember. I'm trying to remember."); 222:7 ("I can't quite remember"); 222:14-15 ("I can't quite remember."); 222:16-17 ("I don't want to say the wrong things, but - I'm so sorry."); 223:10-13 ("I'm trying to remember - if it's possible it had something to do with - I don't want to say the wrong thing . . . but it's something in relation to Nigerians and fraud."); 224:2-3 ("I'm so sorry. I cannot remember her exact words."); 224:17 ("I can't remember.") 

at Page 6 of the DMD Memorandum

As set forth in the Syllabus to the DMD's Memorandum:

This case arises from the alleged discriminatory refusal of Defendant Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Defendant" or "Merrill Lynch") to hire Plaintiff Delilia Uwasomba ("Plaintiff" or "Uwasomba") based on her Nigerian national origin. Uwasomba's Amended Complaint (ECF No. 27) brings a disparate treatment claim (Count I) and a wrongful termination claim (Count II) under Title VII of the Civil Rights Act of 1964 ("Title VII"), 42 U.S.C. § 2000e, et seq. Presently pending is the Defendant's Motion for Summary Judgment (ECF No. 35). The parties' submissions have been reviewed and no hearing is necessary. For the reasons stated herein, Defendant's Motion for Summary Judgment (ECF No. 35) is GRANTED. Summary Judgment is ENTERED in favor of the Defendant Merrill Lynch. 

In summing up its rationale for granting Summary Judgment to Merrill Lynch, DMD explained, in part, that: 

[U]wasomba's case rests entirely on one vague statement about "Nigerians and fraud" which she cannot precisely recollect. Furthermore, the alleged statement was made by an individual who had no authority to hire her. Quite simply, she has failed to present direct evidence of discrimination related to an individual with authority to hire or fire her. Finally, she has not presented any evidence that she is qualified to work in any capacity for Merrill Lynch. Accordingly, Summary Judgment is ENTERED in favor of Merrill Lynch.