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May 10, 2024 at 02:43 PM
What You Need to Know
- The dispute follows First Republic's collapse and JPMorgan's acquiring its assets.
- JPMorgan wants the advisors to repay over $92M in recruiting loans; the advisors seek $270M in damages.
- FINRA arbitrators have no right to decide the advisors' counterclaims, JPMorgan argues.
JPMorgan Chase units have asked a federal court to stop 16 former First Republic financial advisors from pursuing arbitration counterclaims related to recruiting loans they received from First Republic, whose assets JPMorgan acquired from receivership after the bank failed last year.
The advisors, in arbitration cases before the Financial Industry Regulatory Authority, have asserted counterclaims “seeking to avoid their obligations to repay promissory notes,” according to the lawsuit, filed April 30 in U.S. District Court in San Francisco.
Their counterclaims include fraud, breach of contract, negligence and constructive termination allegations against the brokerage and investment advisor subsidiaries that JPMorgan acquired.
The advisors owed more than $92 million on the loans when they resigned from First Republic as the bank collapsed last spring, the lawsuit says. One wealth manager with loans totaling more than $33 million owed about $28 million when he resigned, according to the complaint.
The loans were tied to recruitment bonuses First Republic used to entice the advisors, a standard industry practice in which the bonuses pay off the loans over time, according to Michael Taaffe, a Florida lawyer representing the 16 advisors.
His clients contend their recruiting bonuses should have vested when they were constructively terminated from First Republic amid its collapse, leaving them with no debt to the company.
The advisors, who also are seeking $270 million in damages, allege in FINRA arbitrations that First Republic executives knew the bank was in poor condition when wooing them and misrepresented the institution as sound.
J.P. Morgan Securities and J.P. Morgan Private Wealth Advisors, as successors to First Republic’s brokerage and investment management subsidiaries, and JPMorgan Chase Bank are seeking an injunction to prevent the advisors from pursuing their defenses with FINRA. They argue, among other points, that the advisors missed a Federal Deposit Insurance Corp. cutoff date for First Republic creditors to file claims against the institution.
They also seek a court declaration that the advisors are barred under the Financial Institutions Reform, Recovery and Enforcement Act from pursuing their claims in the FINRA arbitrations.
“Having failed to exhaust their administrative remedies, those Advisor Defendants do not have the right to seek arbitration of and FINRA does not have the right, power, or jurisdiction to review and decide” the advisors’ claims, the investment firm says.
The JPMorgan plaintiffs “will suffer immediate and irreparable injury, loss, or damage if the FINRA Arbitrations are allowed to continue,” the firm contends.
Subjecting a party like JPMorgan to arbitrating non-arbitrable claims is not in the public interest, the industry giant says. “Any other outcome will chill a potential asset purchasers’ willingness to enter into transactions with the (FDIC) in the wake of a bank’s failure.”
