Merrill Prevails in Arbitration with Former Brokerage Head LaMothe

Lyle LaMothe, a former head of Merrill Lynch’s retail brokerage business, has lost his arbitration claim for hundreds of thousands of dollars due to the financial crisis-era collapse of his company stock holdings.

Three public arbitrators granted Merrill’s motion to dismiss LaMothe’s fraud and racketeering claims, ruling that he missed the Financial Industry Regulatory Authority’s eligibility rule deadline for filing. Finra requires claims to be made within six years of an underlying event, and LaMothe made the claim relating to the 2008-2009 crisis in February 2018, according to the award decision published last week.

The claim is the 11th from former Merrill employees that Finra arbitrators have dismissed on time-bar grounds, said Paul Thomas, a Carlsbsad, Calif.-based lawyer who represented LaMothe. Arbitrators in 34 other cases have denied Merrill’s motions to dismiss, and the cases are pending, he and other plaintiffs’ lawyers said, while some claims have settled.

As in other cases, LaMothe sought triple-loss damages under RICO, the federal anti-racketeering statute, alleging that Merrill failed to tell investors key facts about the quality of loans packaged into residential mortgage-backed investment securities that led to the firm’s sale to Bank of America. Managers at Merrill claimed they were particularly vulnerable because they were required to hold company stock. 

Thomas had argued that the eligibility period for bringing claims should not have begun until August 21, 2014, the day Merrill acknowledged its disclosure failures in a nearly $17 billion settlement with the government. 

“The Panel finds that the underlying substantive occurrences and events occurred at the latest in 2009,” the three arbitrators wrote, adding that LaMothe was a sophisticated investor who understood the circumstances. “The Panel does not find the argument persuasive that a settlement agreement with the government years after the events or occurrences gave rise to the claim.”

LaMothe is likely to ask a federal court to vacate the New York arbitration panel’s decision, Thomas said. Although judges give strong deference to arbitration decisions, the LaMothe arbitrators made “egregious” errors about the facts of law and the start of the six-year eligibility period that merit a vacature finding, he said. 

A Merrill Lynch spokesman declined to comment on the decision or on Thomas’ remarks.

LaMothe, who began his career as a financial advisor in 1987 at Merrill in 1987 and rose to head its sales force from 2008 to May 2011, did not return a call for comment. He is now executive chairman at Snowden Lane Partners, a hybrid registered investment advisory firm in New York created by several former Merrill executives. 

A Finra arbitration panel in Miami last month granted Merrill’s motion to dismiss a RICO arbitration claim from former Merrill Lynch division director Brian Sepe, citing similar eligibility reasons. Sepe plans to file a motion to vacate the arbitration decision, according to Thomas.

He and other plaintiffs’ lawyers also will seek to try in court a complaint for about $100 million from the estate of former Merrill western region director James Billington, Thomas said. An arbitration panel dismissed that case on eligibility grounds, but under terms of their decision the case can be re-litigated before a judge, he said.

An arbitration panel last May reversed a decision it had earlier made dismissing a claim from John Gelbach, another former executive. Lawyers for Gelbach successfully argued that under Finra rules, dismissals on the grounds of eligibility must be unanimous, and one of three arbitrators on that panel had dissented. The Gelbach claim is pending, Thomas said. 

-Jed Horowitz contributed to this story.