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Regulation and Compliance > Federal Regulation > FINRA

Merrill, Brokers Off the Hook for Foreign Investors' Losses: FINRA Panel 

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A Financial Industry Regulatory Authority panel has ruled in favor of Merrill Lynch, a current broker and a former broker in a dispute with two clients, who had accused the firm and its brokers of negligence, fraud and other infractions while handling their investments.

In its Dec. 13 decision, the FINRA panel dismissed the clients’ claims “in their entirety with prejudice.” The claimants were Ilir Hasani and Ivana Vanacova, described in the panel’s decision as two European women who opened up a brokerage account with Merrill Lynch.

Respondent Michael Wasserman served as their financial advisor during the time cited in the clients’ complaint; he remains a broker with Merrill Lynch, according to his profile at FINRA’s BrokerCheck website.

Respondent Matthew Ian Warshaw dealt briefly with the clients at the start of their relationship with Merrill Lynch and was not their financial advisor at the period cited in the dispute; he left the firm (to join Raymond James) before the claims were made, according to BrokerCheck.

Hasani and Vanacova accused the firm and the brokers of negligent misrepresentation, fraudulent misrepresentation, unfair and deceptive practices in securities transactions, breach of contract and more, according to FINRA. In a Joint Amended Statement of Claim, the claimants added a claim of failure to supervise.

The claimants had deposited a “substantial amount of money” into their Merrill Lynch account with the availability of margin borrowing, according to FINRA.

There was evidence presented during the dispute that showed the claimants received written disclosures when the account was opened, describing the firm’s margin lending program, including the risks associated with margin, the margin rate and how margin functioned, the panel said in the decision.

What Went Wrong

From the start, the claimants had said they wanted to invest in stocks of their own choosing and “made clear” to Wasserman that they knew what they wanted to invest in and were confident of their success, according to the FINRA panel.

They bought shares in several companies that initially increased in value. But, when the stocks went down, the women increased their positions in the stocks, informing Wasserman they believed when stocks lost value was the best time to increase their investment in them, according to the FINRA panel.

While the account was open, the claimants made all investment decisions on their own, and “neither sought nor did they receive advice” from Wasserman on what to invest in or how to manage their portfolio, the panel said.

Claimants also “used margin almost immediately [and] they continued doing this throughout the time the account was open,” the panel said, adding “there was evidence showing that at least at one period in the account where the Claimants made about $1 million dollars in profit and yet, did not pay off the margin account.”

But, within six months from the opening of the account, the portfolio had “lost value triggering the first of many margin calls,” the panel noted.

The claimants responded by depositing additional funds into the account or the investments reversed and increased in value to cover the margin deficit, according to the panel; often, “shares had to be sold to meet the margin calls in accordance with the terms of the margin agreement.”

The claimants said they didn’t receive written disclosures and that Wasserman never adequately informed them about how a margin account worked and said they believed a margin account was similar to a European bank loan where stock held by the bank would not be liquidated to cover diminishing equity, according to the panel.

However, the record was “replete with disclosures describing margin and how it worked,” the panel said, adding the evidence didn’t show Wasserman violated any laws or obligations to his clients or that he was a threat for future violations.

Dissenting View

Most of the arbitrators ruled in favor of expunging all references to the arbitration from Wasserman’s FINRA registration record.

A dissenting arbitrator said that the broker didn’t seem to do enough to “ensure that ample disclosures” of the risks of investing in certain transactions and strategies involving speculation and margin trading were being received by the clients — despite the fact that they were apparently traveling in Europe and rarely went to New York to get their mail.

It was “unclear why he did not take the additional step of copying them electronically on all compliance management letters issued for the margin account rather than just once in an email,” the dissenting arbitrator said.

The claimants lost about $2.3 million, according to Lee Holland, an attorney at the Investment Advocates in Concord, Massachusetts,  who has been representing them. His clients “live in Germany, but have resided in several European countries,” he said Dec. 20, noting “the case will be appealed.” Merrill Lynch did not immediately provide a comment to ThinkAdvisor.

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