It was just another hot Indiana summer day when Jay Gagne wheeled his Mercedes into the parking garage of the Merrill Lynch office in Carmel, a suburb of Indianapolis. What he saw as he nosed his car into his space made him wonder just how much longer he could stick it out at the firm. Spray-painted on the wall in front of his space was the taunt “Mama's Boy,” the latest assault in a campaign of harassment by fellow employees that, Gagne alleged in a later complaint against Merrill, was sanctioned — indeed encouraged — by branch management.
Four years later, in August 2005, Merrill cut Gagne a check for $542,663 in compensatory damages and amended his U5 to settle the broker's arbitration against his former employer. Until his departure from Merrill in April 2004, Gagne says he suffered continuous razzing and was fired on a trumped-up charge. He also says he lost half his clients because of Merrill's actions.
Despite the settlement, Merrill denies it defamed the former employee. “We think Mr. Gagne should have received nothing,” says Mark Herr, a Merrill spokesman. “The firm did not defame or disparage Mr. Gagne.” The NASD, as is its custom, provided no explanation of the arbitration ruling and declined to comment about the award.
Gagne's unusual victory — few brokers have ever won an arbitration based on charges of defamation — could establish a new line between acceptable office high jinks and illegal employment practices. In addition, it may stand as an example of how the arbitration process — at least on occasion — can work for reps, not punish them.
“The case shows that arbitration can counterbalance the advantages of the employer and provide a level playing field in which an individual employee can prevail,” says retired Los Angeles Superior Court Justice John Zebrowski. Some industry observers are not as optimistic about its implications. “You would hope it would send a message to a firm like Merrill Lynch, but I don't think it really sinks in over there,” says Bill Jacobson, a securities lawyer at Jacobson & Assoc. in Providence, R.I.
Troubled Beginnings
Gagne says his troubles began almost as soon as he entered the business as a 25-year-old trainee in the Carmel branch in October 1995. He was not, he concedes, the typical novice. His mother, Paula, was a top producer in the branch. With 11 years in the business, she had $75 million in assets and was producing $750,000 a year. Jay's father, Richard, was a broker at Smith Barney, but has since retired. Gagne's family connection immediately created resentment among fellow brokers — and management, too, Gagne says. He says he became the butt of jokes and he felt that colleagues were hoping he would fall on his face. “‘He's not going to make it. He's just a mama's boy,’ they would say behind my back,” Gagne says.
When the young Gagne began to succeed, the jealousy and ill will only became more palpable, he says. He placed first in every category in the firm's national Fast Start program, which tracks asset accumulation and new accounts. In 1996, he was named district rookie of the year for opening 170 accounts with $10 million in assets, generating $120,000 in production. In 1997, he eclipsed that milestone by earning the distinction of Level I Masters, a ranking among the top 100 financial advisors firmwide in managed account assets. By 1998, the Gagne team was in the Top 50 for managed accounts. He was also declared a “mortgage champion,” ranking first in the firm in number of mortgages in 1997.
But his achievements were always overshadowed by his connection to his mother, particularly after he became her partner. It seems being Paula's son was not exactly the way to win a popularity contest in the Carmel office — or at Merrill at all. Jay's brother, Richard Gagne, Jr., spent two years as a Merrill Lynch rep in the firm's Boulder, Colo., branch, but says he, too, was harassed because of his mother. Richard says he was fired over differences with management. (Merrill declined to comment.)
Paula says her mostly male colleagues had long ostracized her because she was one of the few female producers in the branch. The old-boy environment was “hostile towards women,” recalls Paula. “I felt very unappreciated.” Things got worse for her and for Jay after she was awarded an undisclosed settlement in a sex-discrimination class action brought by female employees across the Merrill empire. “It's absurd to allege that something that happened five years before these events had any effect on this matter,” Merrill's Herr says.
The Producers
Still, the mother and son team were model producers. Their practice, an almost entirely fee-based business, was recognized by CEO Stan O'Neal for its client-servicing model. O'Neal flew in to meet with the Gagnes and ordered a film crew to interview them. After merging his book with his mother's, Jay helped build the practice to $1.8 million in commissions and fees by 2003. Merrill even tapped him to be a national speaker on client servicing, mortgage lending and managed accounts, specialties of the Gagne practice. Still, he was constantly mocked and called “a — hole” or “jerk,” by colleagues, he says. “It was so high school,” Gagne recalls.
Things really got ugly in 2001 when, Gagne says, the harassment began to affect his business. The day before the “Mama's Boy” spray-paint episode, a branch employee accosted one of Gagne's clients, an elderly woman with a $1 million account, and berated her for bringing her lap dog into the office, Gagne says. Gagne whisked the client away and after alerting management to the employees behavior, the angry employee was sent home, Gagne says. When the spray-paint message appeared the next day, Gagne says he told management about the lap dog episode and said he suspected the angry employee was the perpetrator. But management never investigated. “We have no memory of this issue being raised during the litigation and cannot comment on it,” Herr says.
As relations between the Gagne team and the rest of the office deteriorated, Gagne says, management looked the other way when other brokers attempted to poach their clients, a violation of firm rules. “People within the firm didn't respect our business,” Gagne says. “They would openly solicit our clients.” But if either of the Gagnes so much as chatted with another rep's clients in the community of roughly 55 brokers, they were accused of poaching, Gagne says.
Gagne asserts that management also tried to stymie his career. He says that the head of operations and compliance for the Carmel branch discouraged him from attending wholesaler dinners, a critical function for brokers looking to build relationships with money managers. The same manager, he says, reprimanded Gagne for expensing a beer he purchased at a wine tasting for a client who didn't drink wine. His sales assistant, Susan Gillespie, says the manager was being “rude and unreasonable over a $4 beer.”
In another instance, Gagne says the manager ordered him to fill in at the reception desk, a chore that no other financial advisor had ever been asked to do. With respect to there being a double standard at the Carmel branch, “This is simply not true,” Herr says.
“They pretty much singled us out,” Gillespie counters. Initially, she had been reluctant to join the Gagne team, because people in the office had warned her that the principles were very demanding and went through a lot of sales assistants. “People would look at me sideways when they found out I was working for them,” Gillespie says. But she says working for the Gagnes turned out to be a great experience. “I never had any problems. I realized that it was all based on rumors spread between people in the office.” Gillespie followed Gagne and his mother to Raymond James and testified on Gagne's behalf in the NASD arbitration.
You're Fired
The end came on April 20, 2004. Gagne was fired for allegedly violating a rule that prohibits reps from sending notes to clients without first vetting the messages with compliance. The offending letter was actually part of Jay's attempt to make up for a company gaffe, he says. A client had secured a “construction-to-permanent financing” from Merrill to build a new home. But Merrill Lynch Credit Corp., the firm's mortgage subsidiary, lost the purchase agreement and notified the builder, who took the opportunity to rescind the original agreement and jack up the project by $100,000. Unable to come up with the additional money, the client, a pilot with four children, was forced to live in a studio apartment while his new home stood unfinished.
Gagne brought the two parties into his office in August 2003 where they ironed out an amicable resolution. The client, fearful of another snafu, asked Gagne to type up the agreement for them to sign. Gagne did so, using plain letterhead as the client had instructed. Gagne viewed it as just a bit of client service, but months later it gave the branch manager pause: According to firm policy, all “letters or notes” to clients must be approved by management. Merrill alleged that the typewritten document was a legal contract that put the firm at risk. The homebuilder ended up filing a frivolous lawsuit against Merrill, the primary lien holder on the house, in which Merrill opted to settle for $10,000 rather than incur further legal fees.
When brought to his attention on April 16, 2004, Gagne balked at that interpretation, saying that it was no different than typing up wire instructions or filling any other client request. Neither he nor Merrill, he pointed out, were parties to the new agreement; he merely provided the paper and ink. He appealed to higher powers at Merrill, specifically complex director Robert Knapp, stressing that he was only doing a client a favor — to no avail. Gagne says that Knapp, warned him: “Do not ride the white horse of the client to your grave.” When Gagne continued on with his protest, Gagne says Knapp told him, “Make no mistake, the interest of Merrill Lynch comes first. The interests of the clients come second.” Knapp declined to be interviewed for this story.
Gagne exhausted his appeals and packed up his office just four days later. Merrill simultaneously filed a negative U5 form with the NASD, which read, “Mr. Gagne's employment was terminated on April 20, 2004 for failure to adhere to the firm's policies regarding written correspondence and electronic communication and regarding subpoenas and other legal process. This matter did not involve Mr. Gagne's effecting transactions in client accounts.”
That was enough to blackball Gagne at the other wirehouses, he says. “Most of the big firms will not touch a negative U5,” says Jacobson, the lawyer. But, he adds, Gagne's experience is not unique. “Merrill has always been tough on departing employees,” Jacobson says. “They've traditionally been the harshest on Wall Street.”
New Life
After being turned down by the other big wirehouse firms, in July 2004, Gagne found work with Raymond James & Associates, at a branch in Indianapolis. But when he began transferring accounts, Merrill got a temporary restraining order (TRO): Under his employment contract, Gagne was forbidden from soliciting clients or taking documents relevant to customer information, if he was fired for cause.
The Gagnes went to arbitration to get the TRO removed and to prove that he had not, in fact, been fired “for cause” and, thereby, was not bound by the nonsolicitation provision of his contract. The operations and compliance manager for the branch failed to convince the arbitration panel that the document was covered by the internal policy about client communications. When asked if the definition of correspondence in the compliance manual covered the typewritten letter Gagne produced, the manager replied, “Not as it says in there.”
The arbitrators sided with Gagne and lifted the TRO on August 13, 2005. But by then more than 12 months had passed and he had lost half of his book. He also had forfeited $330,000 in deferred compensation from Merrill and a portion of his signing bonus at Raymond James, which would have been equivalent to his trailing 12-months of production, about $500,000.
Meanwhile, back at Merrill, Paula was struggling to keep the practice together. Merrill's legal department had created a script that she and Gillespie were told they should read to Jay's clients: “Jay was terminated for violating company policy. This does not involve your account; your account is fine.” Further, Michael Berger, another Merrill rep, testified before the NASD panel that he was “coached” to tell Gagne's clients that “it's happened that maybe some accounts had been opened against their will [at Raymond James] or against what they were intending to do…Merrill wants me to get intentions from you as to what you're planning on doing.” It did little to assuage clients.
Gagne was free to resume his new practice at Raymond James. But, after years of abuse, he was not satisfied with starting over at the bottom. He decided to seek compensation from Merrill for defamation and to clear his name. “The trust that I worked nine years to nurture and develop with my clients was suddenly obliterated. It destroyed my business,” Gagne says. “Not because I committed a violation against a client, but because I was Paula Gagne's son and I put the client's interest first.”
David Erb, Gagne's attorney and a partner at Saul Ewing in Baltimore, Md., filed the complaint with the NASD in August 2004. “It is a little unusual for an individual to take on a Merrill Lynch given the cost of the litigation,” says Erb, whose bill came to $100,000. But the reversal of the TRO, which established that Merrill had not fired Gagne for cause, was a plus. So was the script that Paula and Gillespie had been told to use. “There was a very substantial injustice here,” says Erb. “The script handed down from the legal department and management sponsored a defamatory message.”
The Merrill spokesman, Mark Herr says: “We took great care to restrict our explanation for his departure from the firm to the objective facts. We have an obligation to our clients to keep them truthfully informed, and we did so.”
On July 25, 2005, an NASD arbitration panel ruled in Gagne's favor, awarding him more than a half-million dollars in compensatory damages and ordering Merrill to expunge from his U5 the false charges relating to his firing. On Aug. 5, Merrill cut him a check. The NASD ruling did not offer an opinion as to why it awarded Gagne compensatory damages, but merely stated that it made its decision after considering both sides of the argument.
Today, Gagne sits in his office at Raymond James. His mother sits nearby — she quit Merrill in late August and transferred nearly her entire $90 million book.
“I'm proud of my son,” she says. “I hope his victory will inspire other people around the country to pursue the reality of justice.”
