J.P. Morgan Securities has sued 16 former First Republic brokers as it seeks to force them to repay over $90 million combined tied to recruiting loans granted when they joined the failed San Francisco bank.
J.P. Morgan is asking a federal judge in California to issue an injunction barring the brokers from pursuing counterclaims against it in arbitration. The bank argues that their claims, many of which were filed late last year, are time-barred by a September 5, 2023 deadline for creditor claims set by the Federal Deposit Insurance Corporation when it auctioned First Republic’s assets in May 2023.
“Absent immediate injunctive relief, Plaintiffs will be forced to unnecessarily waste time and resources participating in the FINRA Arbitrations addressing claims that are barred by federal law and where FINRA has no authority,” J.P. Morgan wrote in the complaint.
At stake is over $92.4 million in outstanding loans that J.P. Morgan said became due when the brokers left for competitor firms. First Republic, known for handing out some of the most aggressive recruiting offers on Wall Street, had paid the brokers around $126.8 million combined when they joined, according to the complaint.
Many of those loans, which were scheduled to be forgiven over a period of roughly nine to 12 years, were issued only a few years—or weeks—before the bank collapsed.
The largest individual note balance mentioned in the lawsuit belongs to Brian J. Zakrocki, who received $29.8 million when he joined from Goldman Sachs in 2020 and another $3.4 million loan in February 2023. Just over $28.2 million of that was still outstanding, according to the complaint.
Zakrocki did not return a request for comment. He and a partner had produced $16.5 million at Goldman and moved to UBS Wealth Management USA in New York in April 2023.
Those loans were a sticking point for brokers who left and prevented many from going to smaller firms where they could not receive a new loan that would be large enough to pay back the unvested balances.
J.P. Morgan, which continues to forgive the loans for those who stayed, sued the 16 brokers individually in arbitration in July. Many filed their counterclaims in late September or dates after the deadline.
Convincing a judge to bar the brokers’ ability to bring counterclaims in arbitration could be a long shot, according to Kevin T. Hoffman, a lawyer who does not represent any parties in this litigation but has previously represented First Republic brokers. The FDIC’s deadline applied to claims against the bank, but most brokers’ disputes would be against its broker-dealer subsidiary.
“They could have claimed that they were misled to join First Republic when they received their promissory notes because they didn’t realize First Republic was being run improperly and at high risk,” Hoffman said. “Those claims should still be good.”
First Republic had over 250 brokers, but dozens left around the time of J.P. Morgan’s purchase, and defections have continued as a round of large First Republic teams managing nearly $15 billion left en masse last month.
A spokesperson for J.P. Morgan declined to comment.
