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Merrill Lynch Appeals $7.7M Award


Merrill Lynch & Co. is appealing a $7.7 million arbitration award that securities lawyers say could foreshadow a tidal wave of trouble for the nation’s large full-service brokerages.

A private arbitration panel made the award last month to a Pittsburgh couple who claimed Merrill didn’t properly advise them on how to handle a large investment in FreeMarkets Inc., an Internet company, and didn’t execute an order to sell 100,000 shares of FreeMarkets stock before they plunged in price. Merrill filed the appeal Aug. 14, saying the couple never gave a clear order to sell and didn’t question why their account statements didn’t reflect that such an order had been carried out.

The couple, Douglas and Deborah Millar, had a “non-discretionary” account with Merrill, meaning they decided whether to make trades rather than giving the discretion to their broker. The brokerage industry has long taken the position that it isn’t required to monitor and protect the investments of customers who control their own accounts.

Two of the three arbitrators found that Merrill breached a duty “to act with reasonable care and diligence” to meet the Millars’ “clearly stated objectives” to sell 100,000 shares when the stock was high, and also didn’t provide them with good strategies to protect their investment. The third arbitrator said Merrill had no legal liability.

Merrill said the decision “extensively enlarges a brokerage firm’s potential liability to its customers.” Stephen Ratner, a partner at Proskauer Rose in Manhattan who has represented many broker-dealers in arbitration, said that although he hadn’t seen the ruling, “it’s an aberrational decision that seems to be well outside recognized parameters.”

Lawyers who represent investors in arbitration said awards against full service brokerages or settlements in such cases have become more frequent, and may be ready to explode in number. Regardless of whether a broker has discretion over a customer’s account, “the firm still has the obligation to place the interest of the customer above their own,” said a Beverly Hills, Calif., attorney who is president of Public Investors Arbitration Bar Association.

Seth Lipner, a Garden City attorney who specializes in investor arbitrations, said it’s “almost impossible” to win appeals in arbitration cases. Arbitrators must be shown to have exceeded their authority or shown a manifest disregard for the law, he said.