Merrill Lynch Wins FINRA Mutual Funds Arbitration Involving Margin

January 18, 2012

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in November 2009, public customer Claimants Aslam and Ayfer Ahmed asserted eight causes of action in connection with disputed mutual funds transactions:

  1. fraud;
  2. negligence;
  3. misrepresentation;
  4. breach of contract;
  5. breach of fiduciary duty;
  6. unsuitability;
  7. misleading communication; and
  8. failure to supervise.

Claimants sought $1.3 Million in compensatory damages plus punitive damages, costs, and fees.

Respondents generally  denied the  allegations and asserted various affirmative defenses. In the Matter of the Arbitration Between Aslam Ahmed and Ayfer Ahmed, Claimants, vs. Merrill Lynch, Pierce, Fenner & Smith Incorporated, Michael Crow, and Patricia Williams, Respondents (FINRA Arbitration 09-06643, January 11, 2012).

At the conclusion of the hearing, Respondent Williams was dismissed by the parties. Also, Respondent Crow requested to have this matter expunged from his Central Registration Depository record ("CRD")

The FINRA Arbitration Panel provided a commendable amount of detail in the Decision, thus enabling us a better insight into the substance of this dispute and the Panel's rationale.

The Panel noted that Claimants' original portfolio was created by a predecessor broker.  Moreover, expert witnesses for both sides considered that portfolio to be diversified.  The holdings in that portfolio were characterized as having "basically remained static" during the relevant time. The Panel determined that "for most of Claimants' many years as a customer of Respondent Merrill Lynch there were no complaints or issues regarding the diversification of these holdings."

Apparently, Claimant had four accounts. Three of the accounts were discretionary and handled by professional outside managers. One account was managed by Respondent Merrill Lynch but was non-discretionary and controlled by the Claimants. The FINRA Arbitrators found that Claimants question the composition of the holdings in the Respondent Merrill Lynch managed account until after they had utilized margin and suffered market losses.

In denying Claimants' claims, the Arbitrators did not conclude that the use of margin in the Merrill managed account constituted some violation of industry rules or custom.  Notwithstanding, the Arbitrators admonished that:

[T]he quality of customer care by Respondents Crow and Merrill Lynch can be questioned, especially in providing guidance to Claimants with the process of borrowing on margin . . .

A majority of the Panel concluded that there were sufficient unresolved questions remaining about Respondent Crow's role in this case and denied an expungement.