Case: Michele and Robert Billings v. Merrill Lynch

Case No.: 11-01948

Description: Securities

Filing date: May 5, 2011

Hearing dates: Oct. 1-5, 2012

Arbitrators’ decision: $1.34 million

Presiding chairman: Harold S. Stern

Plaintiffs attorneys: Jeffrey Erez and Stefan Apotheker, Sonn & Erez, Fort Lauderdale

Defense attorneys: Peter S. Fruin and Julie Portera, Maynard, Cooper & Gale, Birmingham, Alabama

Details: The Billingses, retirees living in Naples, invested more than $10 million over the years with Merrill Lynch, mostly picking their own high-risk stocks in the bio-tech sector. They cashed out some stock in early 2008 as a safety net when their broker suggested they purchase Fannie Mae preferred stock, which at the time cost $18 to $19 per share. Fannie Mae is a government-backed agency designed to expand the secondary mortgage market. The housing market collapsed that year, and the stock went into a free fall, landing at $2 a share when the Billingses decided to sell. It has never rebounded.

Plaintiffs case: The couple’s stockbroker, Miles Pure, recommended the stock, saying it was safe and governmen-backed. The attorneys argued in front of the three-member Financial Industry Regulatory Authority panel that Merrill Lynch’s own analysts had soured on Fannie Mae, listing its common stock as a sell after it dropped 75 percent in value from January to July 2008. Erez said Pure sealed the deal by telling the Billingses he would waive his commission. In reality, Pure made $25,000 on the first $1.9 million purchase. “He did mislead the clients,” Erez said. The couple ended up purchasing $2.3 million of the stock in July and August 2008.

Erez said Pure had to ignore all his company’s positions on Fannie Mae to recommend the stock and clearly was mistaken that the government would back it up if it failed.

Defense case: Attorneys for the brokerage would not comment without permission from Merrill Lynch.

But Erez said it was argued that the couple were high-risk investors who knew what they were doing when they invested in Fannie Mae. Erez said it was no secret his clients weren’t “little old ladies clipping coupons.” But Erez and Apotheker were able to show the FInRA panel that when it came to stocks, the couple picked their own investments. They exclusively used Pure’s recommendations in the past to put their money in what was “cash equivalent” investments, such as money market accounts.

“This was supposed to be their safe money,” Erez said.

Outcome: The FInRA panel on Oct. 16 found a breach of fiduciary duty by Merrill Lynch and its broker, awarding $668,231 each to the husband and wife. The award gives the couple 68 cents for every dollar invested in Fannie Mae preferred stock.

Quote: “He recommended it anyway without disclosing to my clients all these huge red flags that were out there,” Erez said. “The fiduciary duty standard for stockbrokers in every state is different, but the one in Florida is one of the best. It lays out that the broker’s obligation is to understand the investment he is recommending and make a full disclosure on the strengths and the weaknesses of an investment. The panel accepted our argument in the end that he did not fulfill his fiduciary duties.”

Post-verdict: Merrill Lynch has 30 days to appeal the decision, but Erez said he understands the brokerage plans to pay the award. He said there have been many arbitration claims on behalf of clients who lost money with Fannie Mae preferred stock, some of which have settled. But Erez said his research shows the Billings decision is the largest on a claim that went to a final FInRA hearing.