Pochat v. Merrill Lynch, Pierce, Fenner & Smith, Inc.

• Decision Date: 22 August 2013
• Docket Number: Case No. 12-22397-CIV-ROSENBAUM
• Court: U.S. District Court — Southern District of Florida
• Parties: ENRIQUE ALBERTO POCHAT, Petitioner, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., and MERRILL LYNCH INTERNATIONAL FINANCE, Respondents.

ENRIQUE ALBERTO POCHAT, Petitioner, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC.,and MERRILL LYNCH INTERNATIONAL FINANCE, Respondents.

Case No. 12-22397-CIV-ROSENBAUM

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF FLORIDA

DONE AND ORDERED: August 22, 2013

ORDER CONFIRMING AND MODIFYING THE ARBITRATION AWARD

This matter is before the Court on Petitioner Enrique Alberto Pochat's Petition to Vacate Arbitrator's Award [D.E. 1] and Respondents Merrill Lynch, Pierce, Fenner & Smith, Inc., and Merrill Lynch International Finance's Petition to Confirm in Part and Modify in Part, or in the Alternative Correct, or in the Alternative Vacate in Part and Confirm in Part Arbitration Award [Case No. 12-22414-CIV-ROSENBAUM, D.E. 1].¹ The Court has carefully reviewed the pending Motions, all supporting and opposing filings, and the record. For the reasons set forth below, the Court denies Pochat's Petition and grants in part and denies in part Respondents' Petition. Specifically, the Court confirms the underlying Arbitration Award in all respects, except that theCourt modifies the Award pursuant to 9 U.S.C. § 11(c) to allow Merrill Lynch to offset the $200,000 it owes Pochat against the $848,915.48, plus interest from the date of default, owed by Pochat to Merrill Lynch.

I. Background

The Arbitration decision before this Court, Financial Industry Regulatory Authority ("FINRA") Dispute Resolution Arbitration No. 09-7228 (the "Arbitration"), arose from Petitioner Enrique Alberto Pochat's October 2009 termination from his position as a Financial Advisor in the Miami office of Respondent Merrill Lynch, Pierce, Fenner, & Smith, Inc., a national securities brokerage firm and a member of FINRA [D.E. 1]. The Parties dispute various aspects of the Arbitration Award (the "Award"), which actually consists of two awards — one in favor of Pochat and one in favor of Respondents Merrill Lynch, Pierce, Fenner, & Smith, Inc., and Merrill Lynch International Finance (collectively, "Merrill Lynch"). See D.E. 1, Ex. A, FINRA Dispute Resolution Award in Case No. 09-7228. The Arbitrators found Merrill Lynch liable to Pochat in the amount of$200,000 for failing to supervise him properly during his employment in Argentina and also found Pochat liable to Respondents for the unpaid principal and interest on a nearly $1 million loan Petitioner received from Respondents prior to his termination. Id.

A. The Underlying Dispute

Petitioner Enrique Alberto Pochat began working for Merrill Lynch as a financial advisor in 1998, when he was hired by its Buenos Aires, Argentina, branch office. D.E. 1 in 12-22414 at 3. In 2002, Pochat, who had developed a $120,000,000 client book, moved from the Buenos Aires office to the Merrill Lynch international office in Miami, Florida. D.E. 1 at 2-3.

In early 2009, in connection with the merger between Merrill Lynch and Bank of America,certain Merrill Lynch financial advisors were offered the opportunity to participate in Merrill Lynch's Advisor Transition Program ("ATP") and receive loans from Merrill Lynch at a favorable interest rate. D.E. 1 in 12-22414 at 3. Pochat elected to take advantage of the ATP program, and on January 8, 2009, Petitioner executed a promissory note (the "Note" or "ATP Note") with Merrill Lynch in which he agreed to borrow $940,511.00 at an annual interest rate of 3.0% for all unpaid principal. Id. The terms of the Note specify that any outstanding balance becomes immediately payable if Petitioner's employment with Merrill Lynch is terminated for any reason. Id. Section of the ATP Note states, in relevant part,

Failure to Pay or Insolvency. Notwithstanding anything to the contrary contained herein, all outstanding principal and accrued but unpaid interest on this Note shall become due and immediately payable if (a) the undersigned's employment with Merrill Lynch is terminated for any reason . . .

D.E. 1-5 at 67-69² (emphasis added). The terms of the Note also state that its "provisions . . . shall be governed by and construed in accordance with the laws of the State of New York, without reference to the principles of choice of law thereof." Id. at 68. On January 23, 2009, Petitioner received the loan amount ($940,511.00) from Merrill Lynch. Case No. 12-22414, D.E. 1 at 3.

On October 19, 2009, Pochat's employment was terminated by Merrill Lynch. Id. According to Respondents, Pochat had engaged in an outside investment in a Minnesota company called IPOOL with Merrill Lynch clients when he was employed in Merrill Lynch's Buenos Aires office in 1999, an act known in the industry as "selling away." Id. at 2. At this point, the Parties' renditions of thefacts diverge. Merrill Lynch states that its investigation into the outside investment "conclusively revealed that [Pochat] violated both Merrill Lynch's policies and industry rules/regulations regarding improper and unauthorized selling away to clients and commingling assets with clients." Id. at 3. Although Petitioner does not dispute that he entered into the IPOOL investment with Merrill Lynch clients, he asserts that it was "an act which he disclosed to his manager in Argentina, which was commonplace and done by several other Merrill Lynch Argentina financial advisors at the time with Argentinean clients, and which Merrill Lych had failed to inform him was unauthorized and improper. D.E. 1 at 3. For their part, Respondents retort that "at no time did [Petitioner] ever describe orally or in written detail his role in the transaction, including the participation of Merrill Lynch clients, or the bundling of his clients' assets to purchase securities only in his name." Case No. 12-22414, D.E. 1 at 3.

Upon terminating Pochat, Merrill Lynch filed a Uniform Termination Notice for Securities Industry Registration ("Form U-5") with FINRA, a regulatory form that brokerage firms must file with the agency whenever as associated person's registration and employment with the firm is terminated. Id. at 4. The Form U-5 for Mr. Pochat states that he violated securities industry rules "prohibiting selling away and financial arrangements with clients." Id.

At the time of his termination, Petitioner still owed Merrill Lynch $848,915.48, plus interest, on the ATP Note. Id.³

B. The Arbitration

In December 2009, Pochat commenced a claim in arbitration against Merrill Lynch under the FINRA Code of Arbitration Procedure for Industry Disputes. Id. In his Statement of Claim, Petitioner asserted the following: (1) Merrill Lynch violated FINRA Rules mandating arbitration by filing a complaint against Pochat in New York state court to recover the balance of the ATP Note; (2) Merrill Lynch violated FINRA Rules of fair dealing; (3) Merrill Lynch breached its employment contract with Pochat by violating express contractual provisions and/or "the duty of good faith and fair dealing that is legally implied in the performance of every contract under New York law"; (4) Merrill Lynch was negligent in failing to fulfill its duty to treat Pochat with reasonable and prudent standards; (5) Merrill Lynch tortiously interfered with Pochat's business relationships; (6) Merrill Lynch tortiously interfered with Pochat's "prospective business advantage"; (7) Merrill Lynch engaged in unfair competition; (8) Merrill Lynch disparaged Pochat and used defamatory language in his Form U-5; and (9) Merrill Lynch was unjustly enriched. D.E. 1-5 at 14-20. Pochat subsequently submitted an Amended Statement of Claim on April 29, 2010, contending that the ATP Note was unconscionable. Id. at 20.

In response to Pochat's initial Statement of Claim, Merrill Lynch submitted its Answer and Defenses to Statement of Claim and Counterclaim on February 25, 2010. Case No. 12-22414, D.E. 1 at 4. Merrill Lynch's Counterclaim sought recovery of the outstanding balance of the ATP Note from Petitioner. Id. The Parties also submitted Pre-hearing Briefs on March 28, 2012, in accordance with FINRA rules. Id. at 5.

The final arbitration hearing (the "Hearing") was held over four days in Miami, Florida, from April 17-20, 2012, before a panel of three FINRA arbitrators. Id. The Hearing commenced with thePanel hearing argument on an Emergency Motion that Pochat submitted to the Arbitrators, alleging discovery violations by Merrill Lynch. D.E. 1 at 5. According to Petitioner, Respondents had produced to Pochat additional discovery several days before the Hearing. Id. Pochat argued in his Emergency Motion that the production violated a Panel discovery order and FINRA rules, and he requested that Respondents be "severely sanctioned" for their actions. See D.E. 1-11 at 2. The Panel, after hearing argument from both Parties on the discovery issue, denied Petitioner's Emergency Motion and permitted the late-produced documents to be admitted into evidence. D.E. 1 at 11. The Panel then proceeded with the Final Hearing.

In the afternoon of the last day of the hearing, one of the arbitrators began questioning Merrill Lynch about other Financial Advisors in its Buenos Aires office who may have also invested in IPOOL with firm clients. Case No. 12-22414, D.E. 1 at 5. Specifically, the Arbitrator requested Respondents to produce copies of the other Advisors' "Outside Interest Questionnaires," an internal Merrill Lynch questionnaire that required financial advisors to disclose any investment activities with which they were involved outside the firm. See D.E. 15-1 at 93-103. Apparently, the Arbitrator was interested in determining whether Pochat had been "singled out" for selling away. Case No. 12-22414, D.E. 1 at 5. Merrill Lynch objected to producing the documents without testimony, but the Panel overruled its objection. Id. at 6. Respondents then made an oral Motion to Adjourn the hearing so that Merrill Lynch could conduct further discovery and present testimony regarding the requested materials. Id. After deliberating off the record, the Panel denied Respondents' Motion and required Merrill Lynch to produce the Outside Interest...