A yearlong legal battle between JPMorgan Chase and a group of former First Republic Bank advisors is revealing that the dust has yet to settle in the wake of First Republic's ugly 2023 implosion.
The legal contest is being waged to settle the question of whether the advisors should be responsible for repaying about $90 million in outstanding loans that they received as part of their bonus agreements when they were hired by First Republic, which was acquired and absorbed by JPMorgan after going into receivership in May 2023.
JPMorgan, which bought the advisors' promissory notes when it acquired San Francisco-based First Republic, argues that the bonus agreements require that the loans be repaid in full if the advisors resign, as they all did during the two months before the bank went under. In its court filings, the bank frames the case as a group of advisors waging "nothing more than an improper attempt to retain their windfall."
The advisors, however, are countering in Financial Industry Regulatory Authority (Finra) proceedings that they had no choice but to leave as the bank teetered toward collapse, their reputations became tarnished and their panicked clients fled with hundreds of million of dollars in managed assets. Their lawyers argue that their departures should instead be treated as de facto terminations, which under the terms of their contracts would mean their loans are forgiven.
Among the 16 advisors challenging JPMorgan are several who last year bolted to Rockefeller Capital Management, including Larry L. Rothenberg, Shaun M. Van Vliet, Schuyler H. Perry and Timothy Deygoo, who reportedly managed $2.3 billion at First Republic. Other advisors in the case went to RBC Wealth Management—one of the biggest beneficiaries of the bank's advisor exodus—as well as Wells Fargo, UBS and Morgan Stanley.
Far from agreeing to repay the loans, the advisors and their attorneys have filed a $270 million counterclaim against JPMorgan that they say includes lost client assets and lost deferred compensation.
Moreover, the advisors' attorneys are arguing that First Republic, or more specifically its former broker and advisor subsidiaries, hired the advisors under false pretenses, at a time when bank executives secretly knew the bank was on the verge of collapse. The advisors, attorneys argue, were kept in the dark as First Republic executives allegedly sold off their personal bank shares in the weeks preceding the crisis.
"[The advisors] lost hundreds of millions of dollars because clients left ahead of time," said Michael Taaffe, lead attorney of a team at Shumaker, Loop & Kendrick in Sarasota, Fla., that is representing all the advisors. "The clients lost faith in them and left."
The Latest Legal Salvo
Although the legal battle between the bank and the advisors has been going on since shortly before JPMorgan acquired First Republic, the matter appears to be coming to a head. Finra, where First Republic's former subsidiaries filed the initial complaints about the unpaid loans, is scheduled to begin arbitration hearings on the matter on May 20, according to Taaffe. It will be the first of eight separate hearings by eight separate panels, as some of the advisors will appear as individuals, while others will stand together as teams.
JPMorgan, however, has maneuvered to try to head off the advisors' complaints.
In a petition filed with the U.S. District Court for the Northern District of California in San Francisco last week, the bank is asking the court to issue an injunction that would bar the advisors from making any claims before Finra that have anything to do with First Republic—a ruling that would essentially cause the advisors' case to vanish.
JPMorgan's lawyers say the request is justified because of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), which was passed by Congress in reaction to the savings and loan crisis to facilitate the orderly disposition of failed banks.
One of the provisions of the law, the bank argues in court filings, is that claims against failed banks in federal receivership must be directed at the Federal Deposit Insurance Corporation (FDIC), which under the purchase agreement with JPMorgan "has retained liabilities for all prefailure conduct of the failed First Republic Bank and its subsidiaries." Finra, the bank's attorneys argue, has no authority to hear the advisors' complaints against First Republic for this reason.
"This motion for preliminary injunction asks this court to enforce those congressionally mandated procedures," the bank argues in its U.S. District Court filing.
JPMorgan, in fact, tried to petition Finra to have the FDIC included as a party in the regulator's hearings, but the request was rejected by the arbitration panels handling the cases on the grounds that the regulator has no jurisdiction over the FDIC.
Moreover, in its filings, JPMorgan's attorneys claimed that a failure to issue the injunction would "have a far-reaching, negative effect on the public." This, they went on to argue, is because abandoning federally mandated procedures will make it difficult to sell failed bank assets in the future.
"Allowing Advisor Defendants to bypass FIRREA’s mandatory administrative review process—while, in the process, saddling Plaintiffs with potential liability—will chill future asset purchasers’ willingness to enter transactions with the FDIC in the wake of another bank’s failure," the bank's attorneys wrote.
JPMorgan said $100 million in loans was given to the advisors upon their hiring, with the largest single loan amounting to $20 million. Of the total amount, $90 million remains unpaid, according to the bank.
The advisors include Mark R. Nickel, part of a San Francisco duo who reportedly managed $452 million at First Republic and went to RBC Wealth; Brian J. Addington, who reportedly managed $300 million; and the team of Mark Friedman and Mitchell R. Peters, who managed $400 million. Another team comprising Robert Gehlen and David Mucha went to Wells Fargo after reportedly managing $664 million at First Republic. One team led by Laszlo Paul Vasady-Kovacs overseeing a reported $900 million in assets went to Morgan Stanley.
As for the advisors' counterclaims, the bank describes them as "meritless."
A lawyer for JPMorgan did not return a phone call by press time. JPMorgan spokespeople declined comment.
Nothing Like It
When Taaffe was asked to comment on JPMorgan's latest legal argument, he described it as an unprecedented move.
"I've never seen anyone try to do this," he said, adding that he has nearly 40 years of experience as an attorney in the financial sector.
As Taaffe described it, JPMorgan is asking the court to usurp Finra's authority by calling for an injunction before the regulator's arbitration panels have even ruled. If the bank succeeds, he said, it would open a door for any company facing Finra complaints to ask a court to intervene.
"This could end Finra as we know it," he said.
He said that the bank's argument is undercut by the fact that the advisors were initially sued not by First Republic Bank, but by its two San Francisco-based subsidiaries: First Republic Securities Company, which was absorbed by J.P. Morgan Securities, and First Republic Investment Management, which is now part of J.P. Morgan Private Wealth Advisors.
Taaffe said he views last week's JPMorgan filing as a last-ditch effort to derail the Finra hearings.
"We know for sure that JPMorgan paid a discounted amount for these [promissory] notes at an auction, and they're trying to collect the full value," he said.
In their filings, the advisors' attorneys paint a picture of a group of advisors who, after being given a "rosy" picture of the bank's future by recruiters, found they unwittingly walked into a minefield. One of the first signs of trouble, attorneys say, was when the bank's subsidiaries put unusual pressure on the advisors to put all their clients in depository accounts, even if there was no evident need.
Then, in January 2023, came news that First Republic's interest expenses grew 2,040% from a year earlier, and media reports that bank executives, aware of the bank's plight, had allegedly sold millions of dollars’ worth of personal shares in the company at the end of 2022 and start of 2023.
This, the advisors' attorneys argue in court papers, came at a time when bank executives were assuring employees that the bank "was not in any position to fail."
The advisors' attorneys contend that the scenario amounted to "fraudulent inducement" when the advisors were first hired, followed by breach of contract, fraud and negligence.
What JPMorgan calls resignations, the advisors' attorneys in their counterclaim describe as "constructive termination"—a legal term that refers to a "condition that exists when an employer creates a work environment that is so intolerable that the employee has no choice but to resign."
This point of contention is a key to the whole case, because under the advisors' contracts they are entitled to a "termination payment" that essentially forgives the loan within 60 days of a termination that is "other than for cause," according to court documents.
Taaffe said the impact of the banking crisis still lives with his clients.
"Most of them were experienced advisors, but because of where they were, they obviously got low up-front dollars from" their new employers, he said.
In addition to those already mentioned, the advisors in the case include David E. Farber, Anne Golden, Brian J. Zakrocki, Joseph W. Wladyka and Steven Levine.
—Additional reporting by Eric Rasmussen