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]]> Home | Message Board Home Search Arbitration Investors Brokers Finance Law Compliance Archives Panel Awards $7.7 Million Against Merrill

Failure to Diversify Concentrated Position and to Follow Sell Instructions Leads to Award

MILLAR v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., JAMS Case No. 1410003079 (Pittsburgh, 7/15/02).

Although JAMS is the forum, this $7.7 million Award against Merrill Lynch is publicly available for two reasons: first, Merrill is challenging the Award in federal court; and, secondly, the Millar case is one of a handful of cases that opted under a two-year SICA pilot (the “Non-SRO Forum Alternative”) to transfer out of SRO arbitration to JAMS.

The size of the Award captured media interest in the form of articles yesterday in the Wall Street Journal and other papers, but the Award is noteworthy for a number of reasons. The reasons why liability was assessed and, generally, how damages were determined are items discussed in the Award. One of the three Arbitrators, a retired judge, dissented, stating he would have found “no legal liability on the part of respondent Merrill Lynch for its necessarily limited role in handling the non-discretionary accounts of the experienced and knowledgeable claimant Douglas T. Millar (and his family).”

The entire Panel denied requests for punitive damages, attorney fees and arbitration costs, but, on the compensatory claim, the majority finds that “Merrill Lynch breached certain contractual obligations and duties it owed Claimants under the circumstances of this particular broker-customer relationship….” The particular focus of the majority (a retired judge and an industry arbitrator) lay with “the duty to act with reasonable care and diligence in responding to Claimants’ instructions.”

Those “instructions” were the subject of testimony at the hearing, in which one of the Merrill Lynch brokers conceded “a clear and unambiguous indication of the Claimants’ desire to sell a significant part, 100,000 shares, of their FreeMarkets holdings on September 5, 2000.”

No sale was made, so the majority applied a mitigation duty and, for reasons explained in the Award, adopted December 26, 2000 as the date by which Claimants “are charged with a sale in mitigation.”

Compensation for the loss of “use of this money” is set by reference to “the ten year tax free municipal bond rate on September 5, 2000, increased to account for the fact that Claimants will be required to pay taxes on this award at ordinary income rates.”

Interestingly, the FreeMarkets stock continued to climb in price after September 5, before starting the price decline that drew the losses.

The majority considers other arguments for liability made by Claimants, such as a duty to hedge during the lock-up period when Claimants were bound not to sell and the suitability of a covered call strategy, once the stock was free for sale. While crediting the liability theories as valid, the majority rejects them for want of proof of damages that would exceed those already granted under the order failure finding. The majority states it thusly: “The Claimants have asserted that Merrill Lynch also failed in its duty to identify and explain to Claimants possible strategies to implement during the lockup period; the majority finds that Respondent did fail in this duty but that Claimants have not proven any such strategies were either practical or would have been adopted by them. Additionally, Claimants contend, and the majority finds, that the covered call strategy recommended and carried out by Respondent postponed monetization and was inconsistent with Claimants’ stated objectives.”

(SAC Ed: According to the Journal, the Millars bought FreeMarkets privately for about $1 per share, it went public at $48 per share in December 1999, hit $280 on the first trading day, and “closed Tuesday on the Nasdaq Stock Market at $6.86 a share.” From our reading, it was the concentrated nature of the position that drove the Panel’s determination of a need to “monetize” and made selling half manifestly appropriate. The dissent declined to elaborate on his view, but investor sophistication and non-discretion evidently played a role in strictly interpreting the stated indication to sell as less than an order to sell.) (SAC Ref. No. 02-34-03)


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Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article. 


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