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Monday, July 15, 2024 | Back issues
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Merrill Lynch Faces Costly Class Action

CHICAGO (CN) - Merrill Lynch financial advisors who claim they were denied pay and promotions because they are black can sue the investment firm as a class, a decision that could cost the firm dearly, the 7th Circuit ruled.

The 700-person class, led by Nashville financial advisor George McReynolds, alleged that Merrill Lynch's company policies result in unintentional discrimination, known as disparate effect, against black bankers. Specifically, the class challenged the company's "teaming" and "account distribution" policies under Title VII of the Civil Rights Act.

At each Merrill Lynch branch, brokers are encouraged to divide themselves into client-sharing teams. "The aim in forming or joining a team is to gain access to additional clients, or if one is already rich in clients to share some of them with brokers who have complementary skills that will secure the clients' loyalty and maybe persuade them to invest more with Merrill Lynch," the 7th Circuit summarized.

While not all brokers join teams, teaming up allegedly presents substantial benefits.

But white brokers tend to form all-white teams, according to the complaint. Though brokers probably focus simply on the bottom line and "would doubtless ask a superstar broker to join their team regardless of his or her race ... there is bound to be uncertainty about who will be effective in bringing and keeping shared clients; and when there is uncertainty people tend to base decisions on emotions and preconceptions, for want of objective criteria," Judge Richard Posner wrote for the three-judge panel.

The class alleged that discrimination also occurs in account distribution, the process by which Merrill Lynch assigns accounts after the departure of a broker. These assignments consider the past financial success of the competing brokers and the number and type of the client's investments.

But black advisors say that consideration of brokers' track records favors those who are able to join successful teams, creating a "vicious cycle" of low performance.

"Team participation and account distribution can affect a brokers' performance evaluation, which under company policy influences the broker's pay and promotion," Posner summarized. "The plaintiffs argue that these company-wide policies exacerbate racial discrimination by brokers."

Though U.S. District Judge Robert Gettleman denied class certification, the class filed a renewed motion after the Supreme Court's decision in Wal-Mart Stores v Dukes.

In the Wal-Mart case, the court decertified a class of 1.6 million women who claimed sex discrimination.

McReynolds claimed that the justices' definition of a "uniform company policy" warrants certification of his class. Gettleman again denied the motion, but indicated in his notes that the 7th Circuit should review the decision.

The three-judge appellate panel unanimously reversed on Friday. "We have trouble seeing the downside of the limited class action treatment that we think would be appropriate in this case," Posner wrote.

"A denial of class certification often dooms the suit - the class members' claims may be too slight to justify the expense of individual suits," the decision states.

"Because class actions are cumbersome and protracted, an early appellate decision on whether a suit can be maintained as a class action can speed the way to termination of the litigation by abandonment, summary judgment, or settlement," Posner added.

The plaintiffs presented evidence black Merrill Lynch brokers earn less on average than their white counterparts. Because most Merrill Lynch brokers earn at least $100,000 per year, any award of backpay could place a substantial financial burden on the investment firm.

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