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Stockbroker Arbitration Leads to $1.3 Million Judgment Against Merrill Lynch

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Fort Lauderdale, FLMerrill Lynch has been hit with a judgment against it to the tune of more than $1 million in stockbroker arbitration. The judgment, which involved allegations of breach of fiduciary duty rather than allegations of stockbroker fraud, came after former Merrill Lynch clients accused a stockbroker of misleading them about investments.

The arbitration award saw two former Merrill Lynch customers, Robert and Michele Billings, given more than $1.3 million, after they filed a complaint concerning Fannie Mae preferred stock. According to the complaint, clients were told Fannie Mae stock was a safe investment when in fact there was a great deal of risk involved in the stocks. According to reports, the arbitration panel agreed that Merrill Lynch was liable for breach of fiduciary duty.

Among the claims made by the former clients were that Merrill Lynch downgraded its rating on Fannie Mae common stock before strongly recommending clients purchase the stock. Furthermore, the broker reportedly told the Billings that the US government stood behind Fannie Mae preferred shares, although Fannie Mae was losing money because of the collapsing real estate market. Shortly after purchasing their investment, the Billings told their broker to sell the stock, but were allegedly advised to hold off. A month after the Billings invested more than $2 million in Fannie Mae preferred shares, Fannie Mae went into government conservatorship and the Billings' investment was reportedly worthless.

The FINRA award gave the Billings punitive damages, although arbitrators did not disclose the reasons for their judgment. Merrill Lynch has said the firm disagrees with the arbitration panel's decision.

FINRA (Financial Industry Regulatory Authority) oversees claims made against stockbrokers and brokerage firms. Clients of such firms are typically required to sign an arbitration agreement stipulating that, in the event of a dispute, the client will go to arbitration rather than filing a lawsuit. FINRA arbitration panels are currently hearing claims related to the US financial crisis.

Financial firms and brokerages can face FINRA arbitration if they fail to properly oversee their stockbrokers. Arbitration can be filed against firms and/or their employees, depending on the claims being made.

Among claims that can be made before a FINRA panel are breach of fiduciary duty, churning an account (excessive transactions designed to increase commissions for the broker), failure to give an investor material information about an investment and failure to make recommendations based on the investor's income and risk tolerance.

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