The Man Who Took On Merrill
“I’ll give you as much time as you want,” George McReynolds drawls, leaning back in his chair in his Nashville office. That, he says, has been his philosophy during the 30 years he’s worked as a financial adviser at Merrill Lynch. At 69, he’s a slow-and-steady kind of guy: He’s lived in the same home for almost four decades; he never takes his tan Chevy Malibu over the speed limit.
But McReynolds couldn’t wait forever to be treated equally by his employer. Over the years at Merrill—he started there in 1983—McReynolds had gotten used to inequities small and large. With only a few fellow black brokers in the Nashville office, he felt isolated. Often excluded from work social events, he took to eating lunch at his desk; if he was out, he says, the receptionist sometimes told callers he didn’t work there. He also noticed that the other African American financial advisers at Merrill were rarely top producers—meaning they generated less business than their white colleagues—though they seemed to work as hard as everybody else.
In 2001 his manager asked him to team up with two younger white brokers, pooling their accounts and splitting the profits. The bulk of the combined accounts came from McReynolds. Right away the three had problems. “We didn’t agree on how business should be done,” he says. After two years the team broke up, and the office manager gave a majority of the accounts to the younger brokers. McReynolds says he lost $40 million in client assets and had to give up his office. His new desk was in a carrel outside the ladies’ restroom. “In this business, assets equal income,” McReynolds says. “It cut my income in half.”
The incident made him consider suing Merrill, but he worried he’d never prevail in court. (Merrill says numerous factors could determine how the accounts were divvied up after so long.) Then, in the spring of 2004, an arbitration panel found Merrill had systemically discriminated against female brokers and awarded $2.2 million to a single employee. The ruling was part of a spate of cases women brought in the 1990s against the financial industry, including the infamous Boom-Boom Room suit against Smith Barney. At the time, women were a third of managers and executives in finance. African Americans made up 4 percent. In 2004, Merrill had almost 10,000 full brokers, not including trainees; fewer than 150 were black.
The women’s victory gave McReynolds hope. Over several months that year, he and Maroc “Rocky” Howard, a former Army captain in Merrill’s Dallas office, talked about filing a lawsuit. The friends, who’d met a decade earlier, knew they faced steep odds.
During the next eight years, their case meandered through the judicial system, its journey marked by personal and professional misfortune, countless legal setbacks, unexpected breakthroughs—and finally redemption, when, last August, Merrill Lynch and McReynolds announced a settlement. In terms of cash, the $160 million won for 1,400 black brokers was a record for a racial bias case.
McReynolds’s case, a class suit alleging unintentional yet systemic bias, is “extremely rare,” says Michael Zimmer, a law professor at Loyola University Chicago. He estimates that of the roughly 15,000 discrimination lawsuits filed each year, fewer than 100 make similarly broad claims. Most are brought by individuals contesting specific incidents. The suits are so unusual in part because they’re hard to win. Workplace bias has become more subtle, Zimmer says, and thus is harder to prove, and the Supreme Court has tightened the law around class actions. And such suits are big and expensive, “because the employers fight back very hard,” he says.
“They already messed up my career,” McReynolds says now. “I just felt they couldn’t hurt me any more.” In taking Merrill to court, McReynolds put before judges a core and complex question about why the ranks of African Americans were few and their production low: Was society racist—were clients to blame for not giving their business to blacks more often—or was Merrill?
McReynolds was born in Louisville to a mother who taught third grade and a father who worked as a janitor at a bourbon distillery. After the Supreme Court’s 1954 ruling in Brown v. Board of Education, McReynolds’s elementary school became one of the first in the state to desegregate. Before he entered his integrated fifth-grade classroom for the first time, his father warned him to keep his head down and stay out of trouble. His father, he says, was like him: quiet, not one to rock the boat.
When he was a teenager, McReynolds watched a movie on his family’s television that showed stockbrokers working the phones. Making deals looked like a fun job. That thought stayed with him while he worked on the Project Gemini spacecraft program for McDonnell Aircraft, earned an electrical engineering degree at Tennessee State University, then entered the management program at Sears. On the side, McReynolds started playing the market. He made a bit of money, and his broker suggested he join the profession. The small number of African Americans in the industry deterred him. “You know what I look like,” McReynolds countered. The broker put him in touch with a black broker at Edward Jones, where McReynolds got a job in 1980, cold-calling prospects listed in the city directory. After three years, Merrill hired him.
Merrill was founded almost a century ago as Americans began longing for a piece of the action on Wall Street. They started investing in stocks in earnest after the turn of the 20th century, and by the Great Depression about a quarter of households owned equities, according to Julia Ott, an assistant professor in the history of capitalism at The New School. At the time, Merrill Lynch was a large and growing retail brokerage, with about 50 offices scattered across the country. After World War II, investment returned to pre-Depression levels and stayed steady until the late ’70s. The industry itself remained mostly white and male.
In 1974 the Equal Employment Opportunity Commission sued Merrill, then the biggest brokerage, over race and sex discrimination. The firm, which admitted no fault, settled and entered a consent decree promising to increase the hiring of black brokers from a little more than 1 percent of the workforce to 6.5 percent. Merrill still hadn’t met this goal when the pact expired in 1995.
By the beginning of this century, more than half of Americans owned stocks. While the demographics of investors have broadened, the brokerages have been slow to change. In 1994, McReynolds flew to Chicago for an informal meeting organized by experienced black brokers at Merrill. About 50 attended. “For most of us, it was like, ‘Wow, there were other blacks in the firm, and they’re just like me,’ ” says Howard, who met McReynolds at the get-together.
They gathered in Chicago annually for the next several years to compare notes. The challenges they faced, Howard says, weren’t overt. “There’s no group or individual saying, ‘Let’s screw the black guys today,’ ” he says. While white brokers often partnered up, African Americans were rarely asked to join teams. And they consistently felt shortchanged when managers divvied up new accounts. All these problems seemed compounded by the fact that the bigger a broker’s book, the more support—and assets—he’d get from Merrill.
Merrill started several programs over the years to help black brokers. The firm ran focus groups and took over the informal annual meetings. Some sessions Merrill organized were helpful, explaining new products and giving tips for attracting clients. But others, along the lines of “how to manage your manager,” seemed tone-deaf to Howard. “You would have less success than what Obama is having in Congress trying to manage someone who didn’t want you there in the first place,” he says. The brokers would later assert in their suit that Merrill’s efforts were superficial and didn’t address the real issues they believed were holding them back—such as who gets what resources and accounts. Merrill says it focused on helping brokers bring in clients because production played an important part in its calculations for divvying up accounts.
Year after year, the number of black brokers at the firm barely budged. One black employee did particularly well: In 2000, Merrill asked Stanley O’Neal, who came up through the investment banking arm, to run the brokerages. He became chief executive officer two years later. O’Neal, as Merrill would later point out in court filings, is the grandson of a slave and grew up during the 1950s in Alabama, where his family had no indoor plumbing and lunch counters were segregated.
In 2005, Howard and McReynolds hired Chicago-based Stowell & Friedman, the firm that had represented the women against Merrill in the ’90s. Stowell & Friedman took the racial-discrimination case on contingency and footed the upfront costs. Ultimately, 15 other brokers joined the suit. The plaintiffs asked the court to recognize a class of black brokers and trainees who worked at the firm from 2001 to 2006. As with most class actions, the biggest hurdle would be getting the judge to agree they had enough in common to be certified as a class. After that happens, financial expediency and exhaustion drive almost all cases toward settlements.
Merrill reacted swiftly. While it denied the claims made by McReynolds and his team, it did announce changes at the brokerages. The firm created new minority recruitment incentives, added an Office of Diversity to the duties of the unit’s operating chief, and went on a hiring spree that, for a period, more than doubled the number of black financial advisers. (Not many of the new hires stuck around; the attrition rate of black brokers remains high.) O’Neal met with the plaintiffs in New York, and McReynolds got his office back. Among co-workers, though, McReynolds found the response “chilly.” At the Christmas party, only a black sales assistant and a black couple who’d retired would talk to him. “After seeing the way Merrill Lynch treated me and other African Americans, two of my children told me they would never work for a place like Merrill Lynch,” McReynolds wrote in court documents. “A third child who has an MBA was told she was not qualified, even though a colleague’s son without a college degree was hired.”
Through it all, McReynolds kept serving his clients, hoping to see the case through. Every morning he stepped onto the elevator in the downtown office tower and pressed the button for the 17th floor, a button embellished with a drawing of Merrill’s raging bull.
Merrill did not dispute that African Americans made up fewer than 2 percent of its financial advisers and were less likely than white brokers to be top producers. But it disagreed about why. The firm spent more than $12 million on eight experts who argued that society was prejudiced, not Merrill. Their data aimed to show that black brokers don’t have the same access to wealth as their white counterparts, that they have weaker social networks of wealthy potential clients, and that customers are likelier to invest with brokers who are similar to themselves. Merrill said this made white brokers more likely to be higher producers, which in turn made them more desirable teammates to other brokers, who picked their own partners. And because the firm rewarded top producers with more account distributions, this also explained any differences in how new accounts were distributed.
More than a dozen Merrill executives, including O’Neal, testified that the organization was doing the best it could in a business that depended on getting access to the wealthy in America, who are largely white and inclined to socialize with people like themselves. “I think it is a fact of existence that reaching across cultural boundaries and racial boundaries … can be a challenge in this country,” O’Neal testified in a 2006 deposition, sitting across a conference table from McReynolds and at least a half-dozen other plaintiffs. He went on: “The concentration of wealth in most parts of this country … is mostly in the hands of whites, which means, by definition almost, most African American financial advisers have to reach across racial … boundaries to establish those relationships in order to be successful, to build a broad book of business. I think this is one of the seminal challenges of being an African American financial adviser.” That, he argued, “to some degree, maybe a significant degree,” accounted for why white brokers produced more.
“It was hurtful,” says Marshell Miller, a plaintiff. “Although he’s African American, you felt he didn’t really have a clue what we were going through.” Frankie Ross, another plaintiff, says O’Neal seemed to be in denial. Like the others, Ross reiterates that many, if not most, of their clients, people who have entrusted them with their savings and their retirements, are white.
The plaintiffs’ two experts, who charged a combined $1.6 million, argued that Merrill’s policies didn’t just replicate societal realities—they made them worse. They found that black brokers were far less likely to be asked to join teams than white brokers, which in turn limited the size of their books. The experts calculated that this alone accounted for as much as 28 percent of the wage gap.
They also found that, beginning in the first month of the training program for new hires, the company gave more and larger accounts from new customers or retiring brokers to the white trainees. (Merrill disputed their methodology.) That disparity was compounded by a seemingly meritocratic Merrill policy that rewarded higher producers by giving them even more accounts. “Even if all you did was give [white brokers] an advantage in Month One, blacks would always fall behind,” says Linda Friedman, a lead attorney for the plaintiffs.
For McReynolds, the experts’ findings were a revelation, an affirmation that he wasn’t crazy. “We were working uphill, while a lot of people were on level ground,” he says. Ross says the numbers the attorneys uncovered were startling. “All of the things we suspected were not only true, but there was even more,” he says.
Still, Howard didn’t discuss the case with his family and friends. “You are almost embarrassed that you were suffering,” he says. “You were in a position where you could make by most people’s definition a really good salary”—most experienced brokers, including McReynolds, usually make more than $100,000 a year—but at work, “you were being told you were a total failure.” The four men who’d taken the helm of the case—McReynolds, Howard, Ross, and Miller—turned to each other, the only people who knew what they were going through. They’d formed a brotherhood, Howard says.
Amid the drawn-out discovery phase of the case, the group was rocked twice. First, in October 2007, O’Neal was ousted as Merrill collapsed under the weight of flawed subprime securities in a downward spiral that would eventually lead to Bank of America buying the firm. Three days after Christmas that year, McReynolds had a heart attack and a quadruple bypass. Complications caused his heart to stop for 17 minutes, and he remained in intensive care for three months.
McReynolds’s toes, riddled with clots, were amputated. He had to stop flying to court hearings, because his special shoes made security screening a hassle. His wife, Elaine, insisted on driving the eight hours to Chicago with him for the hearings, where, over and over, they kept losing procedural battles. In August 2010, Federal District Judge Robert Gettleman dealt a major blow to McReynolds, ruling that the brokers didn’t have enough in common to be called a class. The decision essentially invalidated the suit and left the plaintiffs with few options other than appealing. To Friedman, who like almost every lawyer in her firm is white, it was inconceivable that the suit might fail. The plaintiffs, on the other hand, were less surprised. They sent flowers and prayers to console her. “Any person who is breathing knows that typically whites see justice differently than African Americans,” she says.
Then came a ruling that changed their luck. In the summer of 2011, in a 5-4 decision in the case of Wal-Mart v. Dukes, the Supreme Court ruled against female workers who had sued Wal-Mart Stores for bias. The court said that Wal-Mart’s decision to give local managers the power to hire and promote workers did not constitute a nationwide policy that discriminated against women. By absolving the retailer of responsibility for local managers, the ruling was widely seen as a serious setback for future discrimination suits. But for Friedman, it had a silver lining: The justices spelled out the type of formal policies, set at the corporate level, that could give employees the common experiences necessary to be considered a class.
The McReynolds team now argued that Merrill had nationwide policies for how brokers teamed up and how the bank doled out accounts. They lost in district court, but with a twist: In denying their class once again, Judge Gettleman made an unusual remark, encouraging Friedman to appeal his own ruling because the Wal-Mart decision had changed the legal landscape. “You’ve made a good argument,” the judge told her in court, “and I think it deserves to be put to rest one way or the other.”
The 7th Circuit Court of Appeals agreed to hear the case, and in the middle of January 2012, George and Elaine McReynolds made the snowy drive back up to Chicago. There, the brotherhood sat side by side in the wood-paneled courtroom as Friedman argued their case. During the first half of the time she had to present, the judges didn’t seem to be buying her arguments. Then, Friedman drew on a trick she’d learned over years of working on civil rights cases. White people, even judges, sometimes seemed to understand gender discrimination better than racial bias, so she likened Merrill’s teaming policy to when police departments first allowed women into the force. If departments allowed veteran officers to pick their own partners, the force would never have been integrated, she reasoned. This, Friedman argued, is what was happening to black brokers at Merrill. Judge Richard Posner, one of the leading conservative jurists in the country, pounced on the analogy, posing a series of additional questions. “Is it like a fraternity? They’re not picked?” he asked.
“When Judge Posner related it to a fraternity, we felt somebody finally got what we were trying to say,” McReynolds says. “It wasn’t clear that he would rule our way, but at least he understood our perspective.”
About a month after the hearing, Posner and the two other judges ruled in McReynolds’s favor, ordering the district judge to certify the class. Posner wasn’t saying that Merrill did discriminate—that’s something that would be argued in trial—but that the brokers did face companywide policies. Citing the example of female police officers, Posner wrote that the teaming policy could set off a “vicious cycle” where black brokers aren’t chosen for teams, so they earn less, so they don’t get as many accounts given to them, which in turn makes them less likely to be put on teams in the future. Friedman says the decision was the first time a judge certified a racial class against a financial firm, where the certification was not itself part of a settlement.
A trial was scheduled for early 2014, but by the summer of 2013, Merrill agreed to settle. The firm denied any wrongdoing but said it would pay $160 million, the largest cash award ever in a racial-discrimination employment case. Stowell & Friedman has asked for 21 percent of the pool; the rest will be split up among the more than 1,400 black brokers employed from 2001 to September 2013. The class representatives, 17 named plaintiffs, will each get a $250,000 bonus for their involvement in the case. How much each plaintiff gets will be determined by an independent monitor, but given McReynolds’s tenure, it’s not hard to imagine that his take could approach $1 million.
Merrill also agreed to three years of policy changes. The firm won’t distribute accounts to trainees in their first year and will place extra emphasis on the clients trainees bring in on their own. Merrill will hire two coaches to work with black brokers and two experts, one chosen by the plaintiffs and one by Merrill, to study the impact of team selection. Finally, all the settlement efforts will be overseen by a council of black brokers. “This is a very positive resolution of a lawsuit filed in 2005,” Merrill Lynch spokesman Bill Halldin said in a statement. “These new initiatives, developed in partnership with African American financial advisers and their legal team, will enhance opportunities for financial advisers in the future.” McReynolds will be on the committee in the first year. Similar changes implemented at Coca-Cola, after it settled a 2000 bias suit, helped make it a diversity leader. Among the soda maker’s employees today is McReynolds’s oldest daughter, Jennifer.
McReynolds was at home recovering from another surgery when news of the settlement broke. Elaine and his daughter Julie fielded a week of near-constant calls from the press. McReynolds received letters and calls from supporters, and one former black broker from Merrill made what Elaine calls “a pilgrimage to George” to thank him in person for bringing the suit.
The Supreme Court’s ruling in Wal-Mart v. Dukes “no question was a setback” for class actions, says Cyrus Mehri, a plaintiffs’ attorney who wasn’t involved in this suit. Even with the McReynolds ruling, plaintiffs won’t bring “a lot of cases” because they’d be such a long shot, he predicts. The McReynolds case has, though, “breathed life” into employment class actions in which the facts may point toward discriminatory corporate policies, he says. Stowell & Friedman, for one, is bringing a similar suit against Wells Fargo’s brokerage, which declined to comment.
The men say they’re ready to put the suit behind them. McReynolds expects to travel more and do some sailing, if his health holds up. But first the brotherhood will savor one last chance to be together on Dec. 6, when they expect Judge Gettleman to give the settlement final approval. Jennifer, with her husband and daughter, will meet the family at the courtroom. George, Elaine, and their two other kids will pile into the Chevy. Two decades after the brokers began informally meeting, and eight years after filing his case, McReynolds will make what he hopes is his last long drive to Chicago.