Fired Merrill Stars Face Regulatory Action Over Whiskey Investment
A high-profile, high-producing team of former Merrill brokers who were fired a year-and-a-half ago for allegedly failing to disclose outside businesses and investments they were making alongside clients are in regulatory hot water over the same issues.
The Financial Industry Regulatory Authority’s enforcement division will prosecute alleged rule violations against Stephen Brown and James Goetz, according to an updated disclosure from the regulator on their BrokerCheck database records. The records had previously noted that Finra was investigating the reasons for their dismissal.
Brown and Goetz worked together for more than 15 years at Merrill’s Pittsford, NY, office near Rochester and were managing more than $2.5 billion of client assets when they were terminated in September 2014.
Brown, who once owned a Rochester-area bar, was soliciting clients to invest in expansion of a business he controlled, a senior Merrill official has said. Brown’s updated BrokerCheck discloses that he co-founded the distillery in 2011.
The escalation of the Finra investigation into a “pending” enforcement action highlights growing regulatory concern about so-called trading-away activities where brokers escape compliance scrutiny from their firms, lawyers said.
Thomas Lewis, a New Jersey lawyer representing the brokers, declined to discuss details of their case but said they look forward to being able to respond to any Finra allegations and to review documents that may become available in discovery.
“They’re terrific guys,” he said. “I want nothing more than to help them resolve these issues.”
Brown and Goetz have been slowly rebuilding their practice and currently manage over $1 billion of client assets at Stifel Nicolaus, he said. They joined Stifel within a month of their termination from Merrill’s upper-end Private Banking and Investment Group (PBIG).
Meanwhile, they also are fighting to keep the retention bonuses they received when Bank of America bought Merrill in 2009 and to collect back pay that they allege Merrill has wrongly retained.
Merrill has filed an arbitration claim for repayment of about $300,000 of the “forgivable” retention loans, while the brokers have counterclaimed for some $2 million of deferred pay that Merrill has retained. The pair also seeks additional damages over defamation.
Before the arbitration proceeds, they will try to resolve some claims before a mediator, Lewis said.
A Merrill spokesman declined to comment.
Brown, who had been with Merrill since 1988, failed to disclose “outside business activities,” the company wrote in a regulatory filing explaining his termination. He and Goetz also withheld information about co-investments they made with clients in ”private securities transactions,” according to Merrill’s filings.
Goetz, who joined Merrill a decade after Brown, also was not “forthcoming during an internal review” of his investment activities, according to Merrill.
A lawyer who previously represented Goetz and who asked for anonymity said his client had been too upset to respond to Merrill officials and lawyers when they unexpectedly pulled him in for a grilling in 2014.
Firms have increasingly seized on lack of disclosure of outside business activities and of liens as reasons for terminations. Morgan Stanley cited failure to timely report tax liens as a reason for firing Ami Forte, whose alleged abuse of an elderly client cost it more than $32 million, database.
-Jed Horowitz contributed reporting.