Facts

ACCORDING TO THE CLAIMANT: In May 2003, respondent/counter-claimants, Richard Ina, Daniel Morilak and Michael Parziale were recruited from their prior employment with a major wirehouse in Chagrin Falls Ohio (near Cleveland) to join claimant/counter-respondent Banc of America investment Services (BAIS) in San Diego by the branch manager for BAIS at the time, David Ohanian. At the time they commenced their employment with BAIS, each of the respondent/counter-claimants entered into two respective promissory notes in the form of forgivable loans with BAIS. One of the promissory notes for each was received immediately upon commencement of employment. The other of the promissory notes for each was received upon meeting asset generation goals.

Within a few months of employment, Ina, Morilak and Parziale successfully brought over approximately $130 million in client assets, thereby each qualifying for the second forgivable loans. In addition to a successful transition of their existing book of business, the team quickly established themselves as one of the largest producing teams for BAIS in the San Diego market. Witnesses for BAIS testified that the team forged close relationships with members of Bank of America’s Premier Banking division and the consumer bank.

Ina, Parziale and Morilak alleged in the arbitration that within the first month of employment with BAIS, Ohanian reneged on a promise to hire their former sales assistant and to open a Cleveland office for them. Ohanian denied that he had ever promised to open a Cleveland office. He testified that he had intended to hire the former sales assistant on a temporary basis, but that during the group’s transition to BAIS, their former employer sought and received a temporary restraining order against them due to alleged wrongdoing on the part of the group in violation of policies and procedures. Indeed, Ohanian testified that he learned during the transition that, in contravention of specific instructions by him and by counsel hired on their behalf, they had taken approximately 15 binders of proprietary materials from their former employer. BAIS was negotiating a settlement with the former employer, and Ohanian became concerned that hiring their assistant would disrupt the negotiations and further exacerbate problems.

Ina, Parziale and Morilak further alleged in the arbitration that they had been promised a portion of a $25 million book of business in a financial advisor who was leaving the company. Ohanian testified that the book was to be divided by client zip code and disseminated to the financial advisor assigned to the banking center in which the client was located, a large portion of which was in the banking centers to which Ina, Morilak and Parziale were to be assigned. Another financial advisor testified during the arbitration that his team was promised a portion of the same book of business. At the arbitration, documents substantiated that both teams received a portion of the book of business.

The primary focus of the claims, however, stemmed from alleged representations regarding the amount of assets on deposit in the banking centers to which Ina, Morilak and Parziale were to be assigned. Ina, Morilak and Parziale testified that they learned in February 2004 that the amount of assets on deposit in the banking centers to which they were assigned were less than they had been told by Ohanian during the recruiting process. Ina, Morilak and Parziale claimed that Ohanian misrepresented that there would be $3 billion in deposits in their assigned banking centers. In July 2004, they approached Ohanian and insisted that he do something about the discrepancy. Ohanian claimed that the $3 billion figure came from information provided to him and only was discussed in the context of the wealth opportunity available for the banking centers, not as actual deposits.

Ina, Morilak and Parziale took their concerns to the regional manager, Frances Kimbrough, who referred the situation to Human Resources for an investigation. After extensive investigation of the allegations, including review of any documents provided to support the claims and interviews of other employees that Ina, Morilak and Parziale alleged also had received incorrect information from Ohanian, BAIS informed Ina, Morilak and Parziale at a meeting in September 2004 that the company had determined that there was a misunderstanding regarding the information, but no finding of misrepresentation. After Ina, Morilak and Parziale learned of the findings, the meeting quickly devolved when they did not accept the results. Kimbough and Bank of America assistant general counsel Jay Price who attended the meeting both testified that Ina began yelling and calling Ohanian a liar. Kimbrough further testified that the team claimed that they could not and would not continue working with Ohanian, and that Ina demanded monetary compensation in the amount of $3 million for himself; $3 million for Parziale; and $1 million for Morilak.

After further review by a team of investigators confirmed the results of the prior investigation, BAIS held a meeting with Ina, Morilak and Parziale wherein they were informed that BAIS was rescinding their employment agreements based on a mutual mistake, thereby terminating their employment. Assistant general counsel Jay Price testified that they informed the team of the rescission and that BAIS was electing not to enter into a new contract. BAIS thereafter marked each individual’s U5, a form required to be filled out by the NASD, with “involuntary termination.” Testimony at the arbitration substantiated that involuntary termination is the only option available to an employer under the circumstances.

After the meeting wherein Ina, Morilak and Parziale were informed of the rescission, BAIS management met with other employees in order to allay any concerns that they had regarding their own circumstances. Two of the employees who participated in those meetings testified that they felt intimidated upon learning of the sudden departure of Ina, Morilak and Parziale.

In March 2005, BAIS initiated an NASD arbitration against Ina, Morilak and Parziale to recover on the promissory notes. Ina, Morilak and Parziale filed a claim in the San Diego Central branch of the California Superior Court against BAIS and Ohanian for violation of California Labor Code Section 970, violation of Labor Code Section 232, fraud and deceit, negligent misrepresentation, breach of oral contract, tortuous interference with prospective economic advantage, violation of Labor Code Section 1050, defamation, promissory estoppel and declaratory judgment, against BAIS in the San Diego Superior Court. Their wives also filed claims for misrepresentation, fraud and deceit.

Hon. Patricia A.Y. Cowett ordered that, except for the claim of violation of Labor Code Section 232, all of the claims of Ina, Morilak and Parziale were compelled to NASD arbitration. The claims of the wives and the claim of violation of Labor Code Section 232 would remain in state court pending the outcome of the arbitration.

Arbitration began in June 2006 and concluded in September 2006. More than 20 witnesses were called to testify, including current and former BAIS employees. During the course of the arbitration, the panel requested that the parties brief the issue of rescission and specifically, how, based upon a theory of rescission of the employment agreements, damages would be measured in order to make the parties whole.

ACCORDING TO THE RESPONDENT: In May 2003, Michael Parziale, Richard Ina and Dan Morilak (the PIM Group) were recruited away from a major wirehouse in Chagrin Falls, Ohio (part of the Cleveland complex) to join Banc of America Investment Service, Inc. (BOA) in San Diego by the branch manager for BOA at that time, David Ohanian.

Parziale, Ina and Morilak alleged in the arbitration that they negotiated with Ohanian and BOA in the summer of 2003 before leaving their firm in Ohio for BOA in San Diego in August. According to testimony given by the PIM Group, the main aspects of their transition deal were the ability to service their existing clients with investment products and services equal to or better than the major wirehouses; the promise of being assigned to three Bank of America branches with approximately $ 3 billion in aggregate customer deposits (the branches were in La Jolla and Solana Beach); the promise of being assigned a $25 million existing book of investment business; the promise of keeping their current Sales Assistant in a BOA branch in Cleveland; and the promise of financial transition bonuses.

The PIM Group joined BOA in August 2003 and within the first few months brought over $130 million of client assets, thereby qualifying for and receiving approximately $1.3 million signing bonuses and asset transitions bonuses in the form of six-year forgivable notes. In addition to a successful transition of their existing book of business, the team quickly established themselves as the largest producing team for BOA in San Diego. According to witnesses for BOA, the PIM Group forged close relationships with Bank of America's Premier Banking division and the consumer bank.

The PIM Group alleged in arbitration that within the first month of employment with BOA, Ohanian reneged on his promise to hire the PIM Group's former Sales Assistant and the ability to have a Cleveland office. The PIM Group further alleged that, in the first few months of employment, the promised $25 million book of business was assigned to more than 25 advisors leaving the PIM Group with only a fraction of the book. An existing BOA advisor later testified in arbitration that his team was promised the same book of business that the PIM Group was promised.

In February 2004, the PIM Group started to notice the size and amount of referrals from their branches were diminishing. The PIM Group alleged that they researched this further and discovered that the three branches they had been assigned had only about $300 million in deposits instead of the $3 billion they had been promised during the recruiting phase. Later in arbitration, current Bank of America executive Ben Prince and former executive Frances Kimbrough testified that the level of customer deposits in the branches has no correlation to the success of their financial advisors.

In July 2004, the PIM Group approached Ohanian with their discovery. According to the PIM Group, Ohanian responded that there was nothing he could do to rectify the situation for them. The PIM Group then took their concerns to their regional manager, Frances Kimbrough. The PIM Group testified that they tried to work through the situation with Kimbrough offering solutions that they considered fair and equitable. Kimbrough referred the situation to Human Resources.

In August 2004, BOA conducted a Human Resources investigation of current and former employees in San Diego including the PIM Group. The PIM Group had the opportunity to tell the whole story of the broken recruiting promises to Frances Kimbrough and Karen Bahr (BOA’s Human Resources representative). They also provided documented evidence to support their claims of what was told to them in the recruiting process. In addition, the PIM Group disclosed the names of several other advisors they knew of who had complained about lies told to them by Ohanian during their recruiting. Bahr stated that she would have a report to Kimbrough within a week.

Kimbrough held a meeting with the PIM Group in September 2004. In this meeting she told them that BOA reviewed the report from the investigation and that there was no issue that supported their claims and they should just "go back to work." They did not accept this and upon discussing it further, BOA West Coast Chief Counsel, Jay Price, said that BOA really needed to look into the issues further.

Approximately two weeks later a team of investigators from the BOA corporate Audit and Investigation group came to San Diego and conducted lengthy interviews with the PIM Group and a number of other current and former BOA employees.

On Nov. 17, 2004 Jay Price and Francis Kimbrough called a meeting with The PIM Group. Price stated in the meeting that BOA believed there was a "mutual mistake" made during the recruiting and hiring process and that they could not hold the PIM Group to their contracts, and thus BOA was rescinding their contracts. BOA then terminated the PIM Group from the firm. Price emphatically denied that they were firing the team. Rather Price testified in arbitration that BOA was electing not to enter into a new contract. BOA marked each individual's U5 with "involuntary termination." The PIM Group testified that they were then quickly and publicly ushered out of the firm’s offices. Immediately after the PIM Group's firing, the BOA management team conducted numerous back-to-back meetings with the other employees that complained about Ohanian's recruiting practices. Participants in those meetings testified that they felt intimidated by the PIM Group's sudden departure.

In March 2005 BAI made a claim in arbitration for the forgivable notes they extended to The PIM Group. On the same day the PIM Group filed a claim in the San Diego Central Branch of the California Superior Court against BOA and Ohanian for misrepresentation and wrongful termination, as well as claims for misrepresentation on behalf of the PIM Group's wives. Hon. Patricia A.Y. Cowett ordered that the claims for wrongful termination on behalf of the PIM Group and misrepresentation claims on behalf of the spouses would remain in state court pending the outcome of arbitration.

Arbitration began in June 2006 and concluded in September 2006. More than 20 witnesses were called to testify, including current and former BOA employees. BOA claims for the notes and interest accrued thereon were denied in their entirety, allowing The PIM Group to retain approximately $1.3 million in deferred compensation. In addition, BOA and Ohanian were found jointly and severally liable for $1.6 million in compensatory damages awarded to The PIM Group.

Four other brokers testified that they were also lied to by David Ohanian during the recruiting process regarding the amount of assets on deposit at branches for which they were being recruited.

Also according to the defendant, the claimant refused to produce the investigation that is supposedly relied upon to make its termination decision for review either by the arbitration panel or the respondents/cross-complainants based upon an assertion of privilege.

David Ohanian testified that he really didn't know what the numbers he was representing to respondents/cross-complainants meant, which contradicted claimants' version that Ohanian believed that the numbers meant community opportunity.

Settlement Discussions

Prior to the arbitration, the cross-complainants demanded $2.5 million, including a waiver of the PIM Group's wrongful termination claims, which remains pending in the San Diego Superior Court (valued at more than $1.35 million plus interest). They had previously informed BAIS that they were not willing to accept any offer that did not include waiver of the promissory notes plus payment of additional compensation. Claimants offered to waive a portion of the notes as full settlements of all pending matters.

Damages

BAIS claimed that it was owed repayment on the notes in the amounts of $548,333 from Ina; $127,333 from Morilak; and $685,000 from Parziale, plus accrued interest. On their claims, Ina, Morilak and Parziale submitted expert testimony and sought damages in excess of $28 million. They further requested that the panel award double damages pursuant to California Labor Code Section 972 if the panel held that BAIS was in violation of Labor Code Section 970.

Result

After arbitration, the panel ruled against BAIS on its claims for repayment of the promissory notes and awarded damages to Ina, Morilak and Parziale in amounts that approximated the rescission damages that the expert who testified on behalf of BAIS indicated represented the loss of Ina, Morilak and Parziale had incurred by virtue of the rescission of the employment agreements. The amount of the award was as follows: $675,000 to Ina; $200,000 to Morilak; $733,000 to Parziale. The panel rejected the claimant's recission claim. The award to cross-claimants was based upon a finding of misrepresentation jointly and severally against David Ohanian and Banc of America. ARBITRATOR NOTES: Arbitrators were Jerome Libenson, Esq. (Chair), George Tindall and Patricia Reilly.

Other Information

The PIM Group's claims are currently seeking compensatory damages, punitive damages, attorney’s fees and costs in state court for their remaining causes of action.