Schwab, Dynasty and Merrill Lynch breakaway team gain 'leverage' in coming arbitration after rebuffing Merrill's TRO attempt -- but Merrill is still calling it a 'raid' and conspiracy that it will prevail on
Defendants Schwab and Dynasty weighed in with sharp, written responses defending their part in aiding the $129-billion OpenArc RIA opening for business; Merrill is calling TRO process a 'first step'
6 min read
Brooke's Note: The RIA business is not immune from a sense that it's one step forward and two steps back at times. So it's a big deal that Dynasty, Schwab and OpenArc won their first legal round against Merrill Lynch. See: Charles Schwab and Dynasty pull off record-shattering -- and previously unthinkable -- lift-out of $129-billion AUA Merrill Lynch team, but the thundering herd has furiously stampeded to court to block the moveIt feels like three steps forward for the $129-billion RIA and its two principal vendor partners. Yes, there's still a big FINRA arbitration to come, but as the lawyers says in this article, the momentum from this round surely is a good omen. And the arbitration is less about crushing the business, as the TRO had the potential to do, and more about money. Losing money would likely only be one step back for an RIA with a world of promise to generate revenues outside the confines of a wirehouse.
Federal Judge Victoria Calvert gave Merrill Lynch breakaway OpenArc Corporate Advisors the green light today (Sept 30) to stay open for business, and signaled that other wirehouse teams once deemed too big to break away can do the same.
“This changes everything. Any team, any size can choose independence for their clients, team and family,” said Shirl Penney, Founder and CEO of Dynasty Financial Partners, a defendant in the action, in a text message.
“It's not leveled the playing field; it has tilted it in our favor in the RIA space.” See: Merrill Lynch faces 'significant hurdles' to convince judge to restrain its former $129 billion team from pursuing life as Schwab RIA, attorney says
It certainly lessens Merrill's bargaining power as the matter rolls ahead, according to Ari Sonneberg, partner with Wagner Law Group.
“This is definitely a victory for OpenArc, et. al., and will affect the level of leverage Merrill has in any negotiations to settle this matter,” he says.
Merrill Lynch offered a different take through a spokesperson.
“The injunction hearing is only the first step in the litigation process," she writes. "We look forward to vigorously pursuing this matter in arbitration and are confident that a FINRA panel will agree that the defendants engaged in a corporate raid and conspired to poach our employees and clients.”
Merrill Lynch filed a lawsuit last Tuesday (Sept. 24) in federal district court in Atlanta, seeking a temporary restraining order (TRO) to corral OpenArc, which had announced the new company on the same day. Schwab, Dynasty and 12 OpenArc principals were named as defendants.
Brian Hamburger, chief counsel for Hamburger Law Firm, says Merrill's TRO loss matters in the bigger war – and the frantic legal scrambling will now calm down.
“Defeating the TRO is a pivotal battle in the war, for sure,” he says. “It means that Merrill was unable to carry their burden and show that they would suffer irreparable harm by this transition.”
Charles Schwab and Dynasty pull off record-shattering -- and previously unthinkable -- lift-out of $129-billion AUA Merrill Lynch team, but the thundering herd has furiously stampeded to court to block the move
He adds: “The case will presumably proceed on a more traditional pace against the defendants in arbitration before the FINRA [Financial Industry Regulatory Authority].”
The harm factor played a big role, Sonneberg explains.
“Certainly, the fact that the cat was already out of the bag, i.e., that any real harm that may actually exist if at all, has already occurred, did not work in favor of Merrill in its bid for a TRO,” he said by email.
“Beyond showing a likelihood of the case succeeding on the merits – and it seems Merrill has likely not convinced the Court of that in its pleadings thus far – in order to obtain injunctive relief a plaintiff must show a likelihood of irreparable harm that would result from defendant’s not otherwise being barred from continued activity until the case is resolved – the Court was clearly not swayed by Merrill’s motion alleging probable continued harm. ”
Falling short
Penney's swagger was only surpassed by his attorneys in their response, which taunted Merrill for having a one-week head start yet failing to capitalize with “a single factual allegation of theft of ‘trade secrets’ or solicitation."
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Nor has it mounted “an argument to overcome the Protocol for Broker Recruiting, which Merrill Lynch helped to draft relies upon every day when recruiting brokers to leave their firms, and knows is an absolute bar to this motion,” they charged.
Schwab asserted in a response that “Merrill had failed to demonstrate that the balance of hardships tips in its favor or that the Injunction is not adverse to the public interest.”
Calvert, who was appointed to the bench in 2021 by then-President Joe Biden, sided with the defendants after a three hour hearing, according to press reports.
Ruling from the bench, she said Merrill had failed to present enough evidence to meet the legal burden required for a temporary restraining order because most of the damage to its business had “already happened,” Citywire reports.
Merrill Lynch faces 'significant hurdles' to convince judge to restrain its former $129 billion team from pursuing life as Schwab RIA, attorney says
Big loss
The TRO battle has the look of a tone setter for the wirehouse, said Patrick J. Burns, Jr., managing attorney for The Law Offices of Patrick J. Burns, Jr. in Los Angeles.
“This is appears to be a big loss for ML, and very well could set the tone for how the rest of this lawsuit plays out,” he said by email.
“In general, declarations from interested parties.. which have statements such as ‘I believe, ’it stands to reason,' ‘one can only conclude’ are usually the product of a rushed filing or case lacking hard supporting evidence,” he said.
While cautioning he had yet to see the ruling itself, Burns' assessment seemed to sum up the case at this point.
“Merrill does not allege a single actionable fact against Schwab, because it has none. Instead, Merrill’s papers rely exclusively, and improperly, on allegations based purely on ‘information and belief’ and ‘understandings,’” Schwab asserted.
“Merrill’s rank speculation… is insufficient to support any claim against Schwab, let alone demonstrate a substantial likelihood of success.”
Who zoomed whom?
Both sides in the suit alleged that the other engaged in underhanded tactics.
Before the breakaway brokers left the firm, they used threats, scare tactics and willful misappropriation of trade secrets to lure others to leave with them, Merrill asserted.
“In sum, while still employed at Merrill, the individual defendants acted to maximize dysfunction, create fear and confusion, and leave behind a wake of disrupted business operations,” Merrill stated in its complaint.
About 120 employees, including 50 advisors resigned from the wirehouse’s 170-person, high-net-worth team, Global Corporate and Institutional Advisory Services (GCIAS) to join OpenArc.
The OpenArc principals countered that Merrill not only set them up to buy time in secret to prepare the suit and fire them, but also filed the suit without their knowledge to drag their reputations "through the mud via the press.”
Both Dynasty and Schwab said they received no notice of the filing and learned about the action from press reports.
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