Merrill Lynch Settles Customer Suitability Case Despite Apparent Profitability

December 14, 2012


Sometimes it just doesn't add up. (Photo credit: Sean MacEntee)

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in December 2011, Claimants sought at least $100,000 in compensatory damages and alleged the following kitchen sink of causes of action:

  1. excessive trading in equities;
  2. unsuitable trading in equities;
  3. false and misleading statements;
  4. fraud;
  5. negligent misrepresentation;
  6. breach of fiduciary duty;
  7. breach of the covenants of good faith and fair dealing;
  8. negligent supervision;
  9. violation of FINRA rules; and
  10. respondeat superior.

Respondent Merrill Lynch generally denied the allegations and asserted various affirmative defenses. In the Matter of the FINRA Arbitration Between David Holtzman and Susan Holtzman, Claimants, vs. Merrill Lynch Pierce Fenner & Smith Inc., Respondent (FINRA Arbitration 11-04729, December 10, 2012)

Settling Down

On September 17, 2012, Respondent notified FINRA that this matter had settled but requested that the case be kept open to consider the expungement of this matter from financial advisor Lawrence Sailer's Central Registration Depository record. Following an expungment hearing without opposition from Claimants, the sole FINRA arbitrator recommended the requested expungement. In setting forth the rationale for expungement, the FINRA Arbitrator stated:

a. The Statement of Claim alleged that, prior to the date of the disputed investment. Claimants were invested solely in municipals. In fact, only 12% of the Claimants' portfolio with Respondent was invested in municipals.

b. The Statement of Claim alleged that Claimants suffered a loss of $100,000. In fact, at the date on which Claimants closed their accounts with Respondent, the Claimants' portfolio had a net gain of $300,000.

c. The Statement of Claim alleged that the disputed investment was unsuitable for Claimants. In fact, the investment recommendation was based upon the Claimants' voluntary answers to a questionnaire provided by Respondent which answers met the criteria for the disputed investment.

Bill Singer's Comment

As my long history of published commentary in "Street Sweeper" and elsewhere demonstrates, I am far from an apologist for Wall Street and, if anything, remain a constant and principled voice for meaningful reform of an often wayward industry and its inept regulators.  Not only are there far too many victimized public investors but the industry frequently resorts to dilatory conduct and unfair practices when responding to the legitimate complaints of defrauded customers.  As I have famously said, about the only thing on the level on Wall Street is the water in the toilet bowls.

That being said, this case infuriates me.

Online FINRA documents as of December 14, 2012, indicate that this arbitration settled in consideration of $30,000, of which Sailer contributed no portion. According to FINRA's online summary as provided by Respondent Merrill Lynch:


Does the fact that this $100,000 case settled for only $30,000 mean that the customers' allegations were made in bad faith and baseless?  Absolutely not.  Sometimes a settlement takes into consideration saved time and legal costs or the difficulties of presenting witnesses or documents.

Is it important to note that the alleged servicing stockbroker denied the allegations and refused to contribute to the settlement? Ehhh . . . that's a mixed bag. Frequently, the servicing broker (particularly when not a named respondent or defendant in a proceeding) insists that he or she is an innocent being wrongly accused by a venal, disgruntled customer. So, such protestations don't necessarily move me. In this arbitration, however, I am moved - mightily so - towards sympathy for the clearly victimized unnamed broker.

The sole FINRA Arbitrator clearly cast a jaundiced eye on Claimants' claims. First, the Arbitrator explains that what Claimants characterized as an account "invested solely in municipals" was actually only invested in 12% munies. An 88% overstatement of portfolio allocation isn't a minor lapse in pleading.

Next, the FINRA Arbitrator examined the alleged $100, 000 loss, which turned out to have been a net profit of $300,000 - that's a $400,000 turnaround from loss to profit.  Not exactly a simple error in arithmetic.

Finally, the Arbitrator notes that the " investment recommendation was based upon the Claimants' voluntary answers to a questionnaire provided by Respondent which answers met the criteria for the disputed investment." So much for fraud and unsuitability.

What's left of Claimants' ten causes of action?  Going by the Arbitrator's commentary, not much; and, worse, the inference is that there wasn't much of substance from the get-go.

And yet, this case settled for $30,000.

Many will not shed a single tear over this transfer of wealth from Merrill Lynch to the Claimants. Hey, even I'm not about to get all misty eyed.  The balance sheet between public customers and the securities industry is still lopsided in favor of the latter when it comes to compensation for fraud. So, big deal if $30,000 gets picked from a brokerage firms pockets.  Of course, if you're concerned with fairness and justice, that's a whole other issue.

But while my eyes may not be getting damp, my face is certainly reddened.  Ground up in this apparent cesspool of a case according to the derisive analysis of the FINRA Arbitrator is an unnamed stockbroker who didn't contribute a single cent towards the settlement.  Given the shots taken by the Arbitrator against Claimants who " won" this case via settlement, I've got to wonder whether Merrill Lynch should have taken this one to the mat and sought punitive damages. The issues raised in this column are not rare or unique, and they will likely continue to impact many unnamed brokers at the likes of Merrill Lynch, Wells Fargo, Morgan Stanley, JP Morgan, UBS, and that ilk for decades to come.  If the industry had a history of playing fair, perhaps more sympathy would be engendered by the revelation of customer cases like this.  Of course, if my aunt were a man, she'd be my uncle.