What the Merrill Lynch discrimination case tells us about power in numbers
By Amy Radon, Staff Attorney
As The New York Times has reported, brokerage firm giant Merrill Lynch agreed to pay $160 million to settle a lawsuit filed by 700 African American brokers who had accused the firm of race discrimination. It’s a great victory, but it raises an incredibly important question: if this had been an individual lawsuit instead of a class action suit, would an individual have had even the slightest chance of holding the firm accountable for its actions, or changing the firm’s ways?
The suit, filed in 2005, alleged that Merrill Lynch’s system of dividing its brokers into adviser teams ended up segregating and excluding African American brokers from crucial business opportunities that white brokers routinely received, including the opportunity to be on teams to score lucrative clients. In addition to the monetary award, Merrill Lynch has agreed to work with its African American brokers to implement changes that will enhance opportunities for all of its brokers to succeed—not just its white brokers. The court is expected to determine this week whether to approve the settlement.
This settlement is a huge victory for the brokers and serves as a catalyst for what—by all accounts—appeared to be much-needed change at Merrill Lynch. But what would have happened if one plaintiff, acting alone without the benefit of filing suit on behalf of a class of 700 others, filed an individual suit instead? Merrill Lynch certainly would not have agreed to pay $160 million to all of its brokers who were victims of discrimination. Rather, even if an individual had been able to find a lawyer to take on a powerful brokerage firm like Merrill Lynch and had succeeded, the firm would have only paid a tiny fraction of the $160 million to the individual plaintiff and ignored the rest.
It’s equally likely that Merrill Lynch would not have agreed to change anything about its “adviser team” model—why would it, if only one broker asserts that the model is discriminatory, rather than 700?
Unfortunately, there is an effort from some brokerage firms to ban class actions for both employees (like the plaintiffs in the Merrill Lynch settlement) and investors who fall victim to brokerage scams. Class action settlements like this demonstrate why class actions in the securities context are so important, and why the Financial Industry Regulatory Authority (FINRA) is at a crucial crossroad in determining whether or not to let firms like Merrill Lynch ban class actions. Back in June, I wrote a blog about how brokerage firm Charles Schwab is the defendant in an enforcement action by FINRA over whether Schwab can include in its investor contracts a term that prohibits investors from bringing class actions against the firm. If Schwab is successful in defeating FINRA’s argument that it can forbid brokerage firms from banning investor class actions, it won’t be long before these firms take the next step of banning class actions by their own employees.
The upshot is that victories like the Merrill Lynch settlement simply won’t happen, and the rights of classes of investors and employees will be wiped away.
Hopefully it won’t ever get to that point. The internal FINRA appellate review body is scheduled to consider the Schwab case next week to determine whether FINRA can prohibit its own members from banning class actions. And as Susan Antilla of the New York Times reported, the Schwab case “has inadvertently brought fresh and unwelcome attention to the investor arbitration process and its flaws,” as “critics point out that the selected arbitrators do not have to follow the law, rarely permit depositions and typically do not award punitive damages.” Allowing brokerage firms to ban class actions on top of all that might be the straw that breaks securities arbitration’s back and prompts Congress to scrap the self-regulatory system in favor of more government oversight, which is certainly what no one on Wall Street wants.
Regardless of what Wall Street wants, I hope that when the Schwab case is considered, the Merrill Lynch settlement will serve as an reminder of the importance of class actions in the securities world, and that the FINRA review body will send a strong message to Schwab and others that class action bans have no place in brokerage firms’ contracts.
Photo: Lead Plaintiff, George McReynolds. Christopher Berkey for The New York Times