An industry lawyer is accusing JPMorgan of making a "last-ditch effort" to force his clients to pay back more than $90 million in recruiting loans they received when joining the former First Republic.
In this case, first reported by AdvisorHub, the 16 former
Going before Financial Industry Regulatory Authority arbitration panels last year, the 16 ex-First Republic advisors argued that their departures were the result of "constructive terminations." That means they were essentially forced out after finding they couldn't provide services to their clients in ways they had promised.
Michael Taaffe, a lawyer at Shumaker, Loop & Kendrick who's representing some of the former First Republic advisors, said most promissory note arrangements contain provisions allowing the lent money to be forgiven in cases of constructive termination. But his clients aren't just arguing that they should be able to keep their recruitment loans.
They're also leveling allegations of fraud, breach of contract and negligence in relation to promises they were made by former First Republic executives. Almost all of the 16 advisors came to First Republic in the weeks or months before the San Francisco-based bank was taken over by the Federal Deposit Insurance Corporation.
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Taaffe said executives at First Republic knew of the firm's troubles but didn't reveal anything was amiss because they were desperate to shore up its balance sheet by adding deposits. Because of the fraud and related claims, the former First Republic advisors are seeking more than $270 million in total damages, he said.
"They were gaming the system," Taaffe said. "They were bringing these huge books of business over to shore up the bank for a period of time, and then it all collapsed."
JPMorgan did not immediately respond to requests for comment.
In trying to block the brokers, lawyers representing JPMorgan argue that it's too late for such claims thanks to a deadline set by the FDIC for creditors of the former First Republic. When the FDIC auctioned off First Republic last year, it gave potential creditors until Sept. 5, 2023 to submit claims for the repayment of lent money.
JPMorgan said in its complaint in federal court that all former First Republic advisors were told of the deadline in an email sent on May 1, 2023. But the 16 advisors now in arbitration over their promissory notes did not submit their counterclaims until after the data had passed, according to JPMorgan.
The megabank's complaint argues that failure to comply with "statutory time limitations" means "any claim that party has shall be deemed disallowed as of the end of that period, the disallowance shall be final, and the claimant shall have no further rights or remedies with respect to that claim."
Taaffe noted that JPMorgan has already asked the FINRA arbitration panels overseeing these cases to reject the advisors' claims. In every case, the bank's arguments were rejected, he said.
Now, he said, JPMorgan has taken what he deemed as an unprecedented step: asking a federal court to intervene in arbitration proceedings before they're even completed. Taaffe noted that the next arbitration hearing in the former First Republic advisors' cases is scheduled for May 20.
"They want a federal judge to issue a declaratory judgment that what the arbitration panels ruled was wrong and have the panels change their rulings mid-arbitration," Taaffe said. "Which is unheard of, because no one is supposed to interfere with ongoing arbitration."
Sharon Ash, the chief litigation counsel at Hamburger Law Firm, said it's fairly rare for advisors who simply leave one firm for a rival to go through all the hassles of arbitration over outstanding promissory note payments. If they're willing to fight, she said, it's usually because they believe they've been wronged.
"If anything, you hope that this is a lesson to firms that it's a two-way street, that it's not just about the recruiting game and getting advisors in the door," Ash said. "But once they're there, are you going to deliver on what has been promised, and indeed support the business that you say that you're able to support? And if not, then you may have advisors that are willing to come back and say, 'Hey, you breached your agreement with me. Am I the only one that should be held to my end of the deal?'"
Max Schatzow, a founder and partner of
"Although counterclaims can reduce the total amount," Schatzow said.
Taaffe said he rejects the notion that the FDIC's Sept. 5, 2023 deadline for creditor claims has anything to do with his clients' case. He said the actions are being brought not against the First Republic's banking units but rather its brokerage division, First Republic Securities Company, and its advisory arm, First Republic Investment Management.
"The bank is not involved in these arbitrations," Taaffe said.
