Merrill Lynch Ordered to Pay Elderly Sisters Sold Risky CMOs
May 16, 2011
NEW YORK -- An arbitration panel said Merrill Lynch & Co. must pay $933,897 to two clients, a pair of elderly sisters, whose accounts were filled with risky investments. The case is a blow to Merrill Lynch, the nation's largest brokerage firm, which has the best record in arbitration cases in the securities industry. According to a survey this year by the newsletter Securities Arbitration Commentator, clients win arbitration cases against Merrill Lynch 45% of the time, compared with an industry average exceeding 50%; Merrill typically pays out $66,200 per award, the survey said. In addition, the case is unusual because it involves individual investors who bought collateralized mortgage obligations. Much of the legal activity regarding mortgage-derivative losses has involved institutional investors, who generally are better able to understand the risks of CMOs, which incurred steep losses in 2009 when interest rates shot up. In the Merrill case, Amberly Carmon Robinson, 77 years old, and Assunta Robinson Meredith, 71, both of Venezuela, contacted the brokerage firm in 1991 and invested a total of $1.7 million. According to the complaint, they wanted conservative investments. They avoided keeping their money in Venezuela given that country's currency problems, and avoided depositing their money in a U.S. bank because the Federal Deposit Insurance Corp. insures an account up to only $100,000. Their Merrill broker told them CMOs were just like certificates of deposit, except they paid higher interest, the complaint said. In fact, CMOs are created from pools of mortgages sliced into a variety of hybrid securities, with slices called tranches. Each tranche behaves differently when interest rates change, with certain mortgage derivatives fluctuating sharply depending on the tranche. In 1993, according to the complaint, the sisters' Merrill broker advised them to take advantage of a new Merrill program under which they could borrow 75 cents on the dollar to buy more CMOs. He said the investment, which involved buying on margin, was risk-free and the sisters would get a 12% return. But soon after the sisters took his advice and leveraged their portfolios, interest rates began rising, leading to a loss of $950,000. In the arbitration claim filed by attorney Pierre Stroman of WinterPark, Fla., Ms. Robinson and Ms. Meredith sought $1.27 million in damages and interest. For its part, Merrill filed a claim against Ms. Robinson's son, saying he had general power of attorney over the accounts of his mother and aunt, who didn't complain about the CMO investments until interest rates dropped more than two years after they opened their accounts. The three-member National Association of Securities Dealers panel denied Merrill's claims and ordered the firm to pay Ms. Robinson and Ms. Meredith $757,850 in compensatory damages, $101,047 in interest and $75,000 in attorneys fees. A Merrill spokesman said the firm disagrees with the decision ``in this particular case'' and is considering its options, including the possibility of moving to set aside the award. Industry observers say arbitrators typically don't award attorneys fees, so Merrill may be able to make a claim that the arbitration panel exceeded its authority.
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