InvestmentNews (April 5, 2018) — Broker-dealer drops effort to stop 60 cases related to steep Merrill stock dive in 2007-08

A lawyer for dozens of former Merrill Lynch managers said they have a good chance of prevailing against the wirehouse now that their complaints will be heard in arbitration.

The cases involve more than 60 former Merrill executives who claim they lost about $400 million in their brokerage accounts when the stock of Merrill Lynch & Co. dropped sharply in 2007-08 due to the firm’s exposure to subprime mortgages and mortgage-related securities.

Merrill had filed 12 federal court cases to prevent arbitration, arguing that arbitration was not the proper forum because the disputes involved the stock of Merrill Lynch & Co., which is not a member of the Financial Industry Regulatory Authority Inc., the brokerage industry’s self-regulator that runs the arbitration system. The firm’s brokerage arm is a Finra member.

On March 27, after several courts ruled against Merrill on its motions for preliminary injunctions, the broker-dealer voluntarily dismissed its actions.

“We are now ready to get down to the merits of these cases,” said Paul W. Thomas, owner of the Thomas Law Group and one of the plaintiffs’ lead attorneys. “We feel very good. We expect to get our clients the compensation they deserve.”

The first arbitration hearing is set for January.

The former Merrill executives are seeking more than $1 billion in Finra arbitration because the offshore creation of the mortgage-backed securities involved RICO violations, which triple damages.

Merrill likely will argue that its former employees were too slow on the draw. Merrill Lynch & Co. stopped trading as a stock on Jan. 1, 2009. The firm was acquired that month by Bank of America.

“Issues surrounding the drop in the former Merrill Lynch & Co. stock price more than 10 years ago were the subject of extensive litigation addressed in the courts many years ago,” said Merrill spokesman Bill Halldin. “The time to bring claims ended long ago.”

Merrill reached a $17 billion settlement with the Department of Justice in 2014 and admitted wrongdoing in the case.

Mr. Thomas said the six-year clock for eligibility for Finra arbitration should have started ticking in 2014, when more details were revealed about Merrill’s mortgage securities work.

In addition, he asserted that Merrill broke Finra rules when it was not forthcoming with the courts about its arbitration agreements with its former employees, who held brokerage accounts with their employer. Nearly every brokerage account includes a mandatory arbitration clause.

“The violations have occurred until February of this year,” Mr. Thomas said.

Court judges tend to give more weight to statute-of-limitations arguments than arbitrators do, said Andrew Stoltmann, a Chicago securities attorney and president of the Public Investors Arbitration Bar Association.

“It’s a lot harder to get claims dismissed in arbitration than it is in court,” he said.

Another argument that Merrill could make is that their former executives were more savvy than normal investors.

“In this case, it’s not retail investors,” Mr. Stoltmann said. “It’s highly trained, highly financially sophisticated Merrill Lynch wealth managers who presumably had the firm’s resources at their disposal to analyze these securities.”

But Mr. Thomas said his clients were as much in the dark about Merrill’s mortgage-related securities as other investors during the financial crisis.

“If they didn’t know, it doesn’t matter how sophisticated they are,” Mr. Thomas said. “They were defrauded.”