AdvisorHub (February 23, 2022) - (Corrects to note the mark on the Kaplans’ records from Morgan Stanley, which was ultimately expunged, related to employment separation allegations, not a client complaint, and that the Kaplans worked at IHT Wealth Management for three years.)

Two former Merrill Lynch Wealth Management brokers who are twin brothers have taken the unusual step of asking a federal court to vacate an arbitration award after they lost their bid to clear a discharge notice from their records. 

Daniel E. and Adam S. Kaplan, who worked in Merrill’s New York offices for less than one year prior to their firings, argue the award, issued in November 2021 by a Financial Industry Regulatory Authority panel, should be vacated in part because the arbitrator who chaired the panel failed to properly disclose his prior Merrill employment. The arbitrator denies the allegation.

The twins face an uphill battle with their request, which was filed February 16 in the U.S. District Court in Manhattan, since federal judges rarely overturn arbitration awards, according to two lawyers who often represent brokers and brokerages but are not involved in this dispute.

Even if they prove an issue with the arbitrator’s disclosure, the prior Merrill relationship, which was likely at least two decades prior, is probably not material to the controversy in the underlying Finra case, the same lawyers both said.

“I’m not so sure that that’s a substantial relationship with a party,” said Brady Hermann, lawyer with Maurice Wutscher in Dedham, Massachusetts and an outsider to the lawsuit. “Their disclosure argument is probably not as strong as they think it is.” 

It is the second expungement battle for the brokers in the span of their four-year careers. They two came to Merrill with “a complicated history,” and soon each had a pending employment separation after allegations on their records from their stint at Morgan Stanley, according to the lawsuit. They ultimately succeeded in having those allegations expunged.

Brokers prevail in 90% of expungement requests, according to a May 2021 study from the Public Investors Advocate Bar Association, which measured arbitration outcomes over a 15-month span. Finra plans to reissue this year some reforms that it shelved last May following criticism from PIABA that they did not go far enough to limit broker success rates.

On their termination forms, Merrill alleged the Kaplans had each engaged in conduct involving “utilizing client logon credentials to access client accounts.”

The Kaplans in their lawsuit denied Merrill’s allegation on their termination forms and called  Merrill’s U5 statements “retaliatory, defamatory, and false.” Even if they had, Merrill initiated an investigation of the conduct only after it discharged them, not prior to their firing, they argue in their February 16 petition.

“An uncomplicated parting of ways should have been the end of the story,” they wrote. 

Merrill and Finra spokespeople declined to comment.

The arbitration chair, Andrew Schmertz, acknowledged that he was contracted to work 22 years ago as a writer and video producer for Merrill but said he had disclosed that to Finra prior to the arbitration hearing. The industry’s self-regulator had emailed him to confirm it had passed along the information to the Kaplans. 

The twins’ lawyer, Priya Chaudhry in New York, argues that he should have reported it in the initial disclosure report, and the supplement did not adequately describe the extent of his work.

According to Chaudhry, the brothers were managing $20 million when they came to Merrill from Morgan Stankey and had grown their practice to $70 million at the time of their departure.

After leaving Merrill in 2018, the brothers registered with IHT Wealth Management, a Chicago-based registered investment advisory firm founded in 2014 by a former Merrill breakaway. 

IHT, which manages $3.5 billion in advisory assets, fired the Kaplans after three years while “under investigation for violations of the firm’s compliance policies,” according to snapshots of their Central Repository Records. A client had complained to regulators that they had been charged a fee of 2.5% to 3% despite a signed agreement that fees would be 1%, according to BrokerCheck. 

After leaving IHT, the Kaplans were registered in Pompano Beach, Florida with Global Assets Advisory, an RIA which reported more than $211 million in client assets. They stayed less than three months and have not worked in the industry since November 30, 2021—two weeks after the arbitrators denied them their request to expunge Merrill’s allegations.