AdvisorHub (September 16, 2021) - Former Merrill Lynch superstar Phil Scott, who last year took his $18 million-producing team in the Seattle suburbs to First Republic, struck out in an attempt to clear his record of three financial crisis-era client disputes.
A Financial Industry Regulatory Authority arbitrator denied the 36-year industry veteran’s request to expunge from his BrokerCheck record two ‘disclosure’ events in which clients leveled claims of “unsuitable” investment recommendations by the broker, according to a decision finalized on Friday. Scott in June had dropped a third request to remove a dispute with similar allegations, as it was previously denied as part of the underlying arbitration award.
Scott filed an initial statement of claim with Finra in September 2020, a month after decamping from Merrill for First Republic in the wealthy enclave of Bellevue, Washington, naming his former employer as the respondent. Merrill took “no position” on Scott’s requests, according to the letter.
The three client claims at issue were a 2011-filed dispute that settled for $880,000 of $1.7 million requested, a 2012-filed dispute that settled for $872,772.19 of $1 million requested and a 2013-filed dispute that settled for $1.1 million of $2.5 million requested.
Scott, who started his career in 1984 with Merrill, did not respond to requests for comment on the award or what prompted the decision to seek expungement after many years. His attorney, Harris Freedman of Westminster, Colorado law firm AdvisorLaw, also did not respond to a request for comment.
The ‘public’ arbitrator, Jane Ann McKenzie, did not provide a written explanation of her decision to maintain the 2011 and 2012 disclosures. The 2013 dispute had included a ruling denying Scott’s request for expungement of that matter at the time, so she had ordered the broker to amend his statement of claim to remove it, according to Friday’s award.
Each of the clients in the underlying disputes had been represented by New York City-based attorney Barry Lax, who did not return a request for comment on Scott’s bid for expungement. The award did not mention whether the customers had been notified of the expungement requests.
The 2011 claim, filed by a New York family, had asserted that Scott’s team ignored their individual risk tolerances and investment objectives by recommending that “100% of Claimants’ assets be invested in the Merrill Lynch Phil Scott Team Income Portfolios, which consisted of 100% equities,” according to a post on Lax’s website. The alleged activity occurred between 2004 and March 2009, according to the disclosure on Scott’s BrokerCheck.
Scott wrote in his BrokerCheck comments that the clients were invested in the portfolio “per their request,” and that they sold the portfolio at the “lowest point in the market against the specific advice” of his team.
The 2012 claim was filed by former Boston Red Sox catcher Douglas A Mirabelli and his wife, alleging they had invested $880,219 in March 2008 with Scott, who put the money into the same Income Portfolios strategy, and took out loans that made the account worth about $1.8 million, according to a 2012 New York Times report. The loans were made on the condition that the account not dip below $1 million, which it did in November 2008, forcing the Mirabellis to sell the portfolio as the markets were battered by the financial crisis in order to cover the loans, the report said. The Mirabellis had also claimed they were not properly informed on the loans and their requirements.
Scott in his BrokerCheck comments again said the clients sold their positions at a “low point in the market,” against his advice, and “therefore did not participate in the market recovery.”
The 2013 claim, filed by a Washington-state investor, had also alleged unsuitable investments, from March 2008 to October 2009. Similar to the 2011 claim, Scott’s team had “recommended 100% equity portfolios as a ‘safe and moderate’ investment,” but the client ended up losing $2.5 million in the markets following the financial crisis, Lax had said in a 2012 Wall Street Journal report.
In his BrokerCheck comments, Scott said the customer was invested in “blue chip” and dividend growth portfolios but had divested “on an unsolicited basis” as the portfolios were “recovering strongly” after the lows brought on by the financial crisis.
Scott has accumulated seven client disputes since 2001, according to his BrokerCheck report, which also notes his comments that he did not contribute to any settlements and that he denied wrongdoing.
In the most recent allegation, in 2016, a customer seeking $825,000 for unsuitable investment recommendations settled for $125,000. Another for unspecified damages over similar allegations settled for $337,500 in 2013. In two older disputes, one claim with unspecified damages was denied while another seeking $100,000 was closed with no action, according to the database.
A spokesman for Merrill declined to comment while a spokesman for First Republic, a now-publicly traded bank that was once owned by Merrill, did not respond to a request for comment on the matter.
Finra in May “temporarily” withdrew a proposal to reform the procedures to expunge brokers’ public records. The move came on the heels of a report by the Public Investors Advocate Bar Association criticizing the proposed reforms as inadequate and calling for more rigorous procedures to stanch the number of expungement requests that receive approval.
PIABA had calculated that brokers achieved a 90% success rate in the previous 15 months at having arbitrators grant their requests to expunge customers’ complaints from their public records. Finra, reframing the numbers debate on its new webpage, posted a pie chart that shows only 1,550, or 4% of the 35,000 customer disputes between 2015 and 2020, had been expunged.