Excerise and Hold Recommendation Costs Merrill $6.4 Million in Arbitration Award
Employee Option Strategy Recommendation Causes Losses
LOPEZ v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., NASD ID #02-04422 (Dallas, 2/5/04).
Four individuals with employee stock options in Allegiance Telecom, Inc. received a $6.4 million award of compensatory damages against Merrill and one of its Omaha-based brokers. Three of the four individuals reportedly resided in the Dallas area, where the case went forward during January and early February for a total of 21 hearing sessions. Interestingly, the last hearing session took place on February 3, 2004, yet the Award was executed and served by February 5. We note this, because NASD’s response to calls for more information about the nature of dispute consistently refers to the need to issue timely Awards, yet this Award tells the story of the case and still issued quickly.
The “Case Summary” section of the Award relates the various causes of action in the Statement of Claim, but then (in plain English) states that the dispute relates “to the handling of the shares of stock each Claimant received as part of an employee stock option plan with Allegiance Telecom.
Claimants alleged that Respondents advised them to exercise their options and to hold the stock without diversifying the account, while placing the stock into a margin account to pay the exercise costs and taxes, without explaining the risks of such a strategy. Claimants further alleged that [broker] Korkow’s advice was calculated to benefit Merrill Lynch and himself, and that Claimants lost all their wealth and owed additional sums to the IRS as a result.”
Respondents argued in their Answer, among other things, that the damages were caused, not by their actions, but by market conditions, that they acted properly and disclosed all risks, and that Claimants refused to sell their stock (and other holdings), “even as they continued to decline in value over several months.”
The Panel did not offer any reasoning with their decision, but they did, despite joint representation, distinguish between Merrill and the broker. The Arbitrators first allocated $6.0 million among the four Claimants, charging Respondents jointly and severally, and then they assessed an additional $100,000 in “compensatory damages” against the broker, as to each of the four Claimants. (SAC Ed: The kind of brief description of the dispute one finds here and in the occasional NASD Award adds so much content. This small effort appreciably enhances the public’s understanding of the issues the arbitrators faced, all of which aids research, statistical surveys, public perceptions of fairness, and the selection of counsel and arbitrators. SAC thanks to the Arbitrators, case counsel and/or the staff attorney who took the time to assist those important objectives. Jeffrey A. Feldman, Attorney at Law, San Francisco, CA, represented all four Claimants. Just one more general observation: Legal needs to speak to Public Relations about arbitration in terms of its strategic objectives. The spokesperson for Merrill was quoted by the Wall Street Journal as saying “[w]e disagree with the award and believe the panel either misread or misunderstood the evidence before it.” While we have no basis to question the honesty of that belief in this instance, we would observe that PR people who blame the arbitration process every time an adverse Award makes the papers forfeit credibility for convenience and/or add to the mistrust that surrounds an enviably efficient and effective system of justice. If no vacatur attempt is likely, just say you respect the process, did your level best to show the arbitrators your side of the matter, and it is time to move on!) (SAC Ref. No. 2004-06-03).
Copyright 2004 Securities Arbitration Commentator, Inc. P.O. Box 112, Maplewood, NJ 07040; t: 973-761-5880 f: 973-761-1504. Materials denoted with a SAC Reference No. (e.g. SAC Ref. No. 99-01-001) are on hand at SAC and may be obtained by calling the Securities Arbitration Commentator, or by email to email@example.com. The Securities Arbitration Commentator is the leading publication for securities arbitration news and information, and maintains the most complete database of arbitration awards availalble anywhere. For more information regarding their services, visit their website at www.sacarbitration.com
Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.
Mark J. Astarita is a veteran securities attorney representing investors and financial professionals nationwide in securities investigations and arbitrations. Have a question? Email him at firstname.lastname@example.org, call his office at 212-509-6544, or visit The Securities Lawyer
Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.