After leaving Merrill, broker owes nearly $1M for failing to repay recruiting loans

A former Merrill Lynch advisor owes his ex-employer nearly $1 million after jumping ship for a small rival firm, according to a FINRA arbitration panel.

Michael Gloster, now a registered investment advisor and broker in Michigan, was told by an arbitration panel Tuesday that he owes Merrill more than $900,000, plus interest, after failing to pay back money lent to him through promissory as part of the recruitment incentives he received for joining the wirehouse in March 2015. Gloster came to Merrill from Morgan Stanley and left a little more than three years later to join Troy, Michigan-based Secure Asset Management, a hybrid firm with a brokerage arm affiliate named Aurora Securities.

Rick Rummage, the founder and CEO of the Herndon, Virginia-based recruitment firm The Rummage Group, said most recruitment loans like the one Gloster received for joining Merrill are based on the amount of business advisors bring to their new employers. Advisors who had produced $1 million in income in the year before joining a new firm will often receive twice that amount, or $2 million, in the form of a promissory note upon starting their new jobs, Rummage said. In subsequent years, they can receive as much as another $1.5 million in return for transferring their book of business over.

Rummage said the exact percentages can vary slightly from firm to firm but are generally in the same ballpark.

"So if this guy left Morgan and went to Merrill, he probably got around a 350% deal," he said.

Rummage said promissory notes used for recruitment purposes generally will be "forgiven" if the advisor stays put for nine years.

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"So if he stayed three years, that means he owes two-thirds of the money back," Rummage said. "A third of it he gets to keep because he's pro-rated."

Danny Sarch, the president of the recruiting firm Leitner Sarch Consultants, said promissory notes have been used as recruitment incentives for decades.

"It's always been in the terms of contract that if you leave before the money is forgiven — which is detailed explicitly in the agreement — then you owe the money back," he said.

In siding with Merrill, the Financial Industry Regulatory Authority arbitration panel faulted Gloster for breach of a promissory note and obtaining unjust enrichment. It ordered him to pay back the outstanding balance owed to Merrill — $565,358.32 — plus $37.17 in interest for every day between Aug. 3, 2018 and July 18 this year, a span of more than 1,800 days. Gloster also owes $300,000 for attorney's fees.

In a counterclaim, Gloster asked for as much as $2.6 million in compensation for lost wages, as well as punitive damages and legal fees. The FINRA arbitration panel awarded him $300,000.

Gloster and his lawyer, Mark Kowalsky of Taft Stettinius & Hollister in Southfield, Michigan, couldn't be reached immediately. Merrill's lawyer in the case, Edward Heffernan of Rubin, Fortunato & Harbison in Wayne, Pennsylvania, declined to comment.

Arbitration panels assembled by FINRA, the broker-dealer industry's self-regulator, rarely go into the reasons for their decisions. The public release on the Gloster case provided no explanations.

According to FINRA's online BrokerCheck industry database, Gloster has worked at 10 firms since joining the industry in 1991. Before joining Morgan Stanley in 2010, he was at Bank of America Investment Services from 2008 to 2009 and then switched to Merill Lynch following its acquisition by Bank of America around the same time. Gloster's BrokerCheck page shows no records of customer complaints or disciplinary actions.

Rummage said cases like Gloster's are hard to win. That's largely why, he said, it's unusual to see advisors and brokers stand up to their former employers' attempts to recoup recruiting incentives. 

"It used to be that you could fight it so that you could get it reduced," he said. "You would say, 'Hey, how about you settle with me? I'll give you 50 cents on the dollar.' And a lot of times firms would settle."

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Rummage estimated only about half of all firm representatives who nowadays find themselves caught in these sorts of disputes put up any sort of resistance. And of those, about 30% engage in what Rummage deemed a "light fight."

"They get an attorney. They try to make an argument," he said. "But what they're really trying to do is get them to reduce the amount."

Fewer than 10%, Rummage estimated, go on to fight aggressively all the way through arbitration proceedings. If they take things that far, he said, it's often because they no longer have the money they owe their former employer.

"And that's probably what happened here," Rummage said. "It's like, we don't have it, so I have to fight you."