FDIC backs JPMorgan in dispute with ex-First Republic advisors

The FDIC is plopping its weight down in JPMorgan's dispute over recruiting loans made to 16 former First Republic advisors.

In a motion filed in federal court in San Francisco on Wednesday, the Federal Deposit Insurance Corp. called for a halt to the former employees' attempt to avoid having to pay back more than $90 million in recruiting loans and win more than $180 million in related damages from JPMorgan, which bought First Republic out of government receivership in May last year. The ex-First Republic advisors are pursuing their claims before Financial Industry Regulatory Authority arbitration panels.

With Wednesday's motion, the FDIC joined JPMorgan in arguing the former advisors should not be allowed to make their arguments in FINRA arbitration.

"The Advisor Defendants' Claims against Plaintiffs in the FINRA Arbitrations are actually claims against the failed First Republic Bank, and therefore can be adjudicated only by a federal court," the FDIC contends.

The FDIC is a government agency that protects bank deposits up to $250,000 for individual account holders. It also acts as a legal receiver for failed banks, as it did last spring briefly for First Republic just before the failed bank was sold on May 1, 2023, to JPMorgan for $10 billion.

The 16 advisors involved in the dispute left around the time of the collapse for jobs at other firms. In normal circumstances, that would mean they would have to pay back at least part of the recruiting loans — or promissory notes — they were granted for coming to First Republic.

But lawyers representing them are arguing the failure of First Republic essentially forced them out, voiding any obligation to repay. Their legal team also contends the advisors were lured to First Republic by executives who failed to disclose the regional bank was teetering on the brink of collapse — hence their claim for additional damages.

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JPMorgan initiated FINRA arbitration proceedings against the 16 former First Republic employees last year in an attempt to reclaim the recruiting loans. The advisors responded with their own counterclaims leveling allegations of fraud, breach of contract and negligence.

It's those counterclaims that are at the heart of the current dispute in federal court. The FDIC's motion on Wednesday comes in support of a complaint JPMorgan filed late last month asking for the 16 former First Republic advisors to be barred from using FINRA arbitration to press their counterclaims.

Like JPMorgan, the FDIC notes that federal law has established an administrative process for people who are bringing a case against a failed bank.

"Where, as here, a claimant does not file a claim and exhaust the Administrative Claims Process, the claimant is barred … from pursuing any claims or remedies in any court or other tribunal, including FINRA," the FDIC contends.

In its own complaint, JPMorgan says the ex-First Republic advisors were told when their former employer collapsed that they had until Sept. 5, 2023, to submit any claims against the regional bank. None of them met that deadline, according to JPMorgan's complaint.

A JPMorgan spokesperson declined to comment.

Michael Taaffe, a lawyer representing the 16 former First Republic advisors, has said that FDIC rules don't apply to his clients. Their claims, he has said, are being made against the former First Republic's advisory and brokerage arms, not the banks.

The FINRA arbitration panels hearing these cases have already agreed that the FDIC's Sept. 5, 2023, deadline shouldn't bar the former First Republic advisors from pressing their counterclaims. Taaffe has deemed JPMorgan's decision to go outside FINRA to seek an injunction from the San Francisco federal court a "last-ditch effort."

Taaffe said Thursday he doesn't think the FDIC's intervention will make much difference in the case.

"I don't think they have raised anything we weren't aware of," he said. "Our case isn't against the failed bank. It's against the subsidiaries."

First Republic had more than 250 advisors on staff around the time of its collapse. Dozens moved on to other jobs around the time that JPMorgan acquired the failed regional bank.

JPMorgan has since made considerable efforts to persuade the remaining ex-First Republic advisors to stay. The departures have continued nonetheless, albeit at a slower pace. On April 22, for instance, former First Republic teams managing nearly $15 billion announced they were leaving JPMorgan for jobs at Merrill, Citizens Financial Group and Cresset.

Kevin Hoffman, a lawyer who has former First Republic advisors as client but isn't involved in this case, agreed that the 16 formeremployees' dispute isn't with First Republic's bank but with its advisory and broker-dealer subsidiaries. And the proper place for such disputes, he said, is arbitration.

"These are FINRA member firms," Hoffman said. "So to me, they should be able to get their day in arbitration."