Court Backs Stockbroker Arbitration Ruling

Atlanta, GAIn a rare situation in which a stockbroker arbitration ruling has been appealed, a US court has backed the Financial Industry Regulatory Authority's ruling against Merrill Lynch. Arbitrations involving allegations of stock fraud and stockbroker misconduct are rarely appealed—usually the decision is considered binding—but in this case Merrill Lynch was allowed to appeal the decision. The US District Court for the Northern District of Georgia, however, found that the arbitration panel's decision was justified.

According to Reuters (10/26/12), the arbitration was initially filed by investors in Georgia who claimed Merrill Lynch failed to adequately oversee their accounts. The arbitration panel agreed with the investors and awarded them $520,000. Merrill Lynch appealed that decision, arguing that the arbitrators took over the hearing by asking too many questions of the witnesses.

The three arbitrators were fired and then later rehired after FINRA reviewed the proceedings. The US District Court found that the arbitrators' questions did not compromise the hearing, nor how fair the hearing was.

The lawsuit is Merrill Lynch Fenner & Smith, Inc. v. Estate of Robert C. Postell and Joan P. Postell, No. 11-CV-1997, (N.D. Ga. Oct. 25, 2011).

In another arbitration that was also appealed, the US Court of Appeals in New Orleans reinstated an award issued by a FINRA panel, giving $9.2 million to a group of 18 investors. The investors filed a claim against Morgan Keegan & Co, alleging the financial firm overvalued assets held by the funds. According to Bloomberg News (10/24/12), Morgan Keegan appealed the ruling and a federal judge found the arbitrators exceeded their powers. The Court of Appeals disagreed and reinstated the award. The case is Morgan Keegan & Co. Inc. v. Garrett, 11-20736, U.S. Court of Appeals for the Fifth Circuit (New Orleans).

Meanwhile, in a different arbitration hearing, Merrill Lynch was ordered to pay $1.34 million to investors who alleged they were misled about the risks associated with Fannie Mae preferred shares. According to The Wall Street Journal (10/17/12), the investors were strongly advised to put $2.3 million in Fannie Mae preferred shares in the summer of 2008. They way they were told the investment was safe even though Fannie Mae lost billions of dollars and despite Fannie Mae having just been removed from Merrill Lynch's list of "recommended" preferred stocks.

The investors allege as Fannie Mae lost money, their broker discouraged them from selling their shares. When Fannie Mae entered conservatorship, the couple's investment was worthless. The couple filed the arbitration, requesting $1 million plus punitive damages.

The arbitration is FINRA Case No. 11-019048, Billings vs. Merrill Lynch.