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MERRILL LYNCH ORDERED TO PAY $8.1 MILLION IN FINRA ARBITRATION

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In July 2011, an arbitration panel of The Financial Industry Regulatory Authority ordered Merrill Lynch to pay $8.1 million for breaching its fiduciary duty to Staton Family Investments, Ltd.  The complaint against Merill Lynch relates to their seizure of 1.26 million shares of common stock of Duke Realty Corporation.  Staton Family Investments manages the holdings of Daniel Staton, who was the Chairman and CEO of Duke Realty.

As reported by Lorie Konish for On Wall Street, the dispute between Merrill Lynch and Staton Family Investments relates to loans that were made using the Duke Realty stock as collateral.  In October 2008, the stock market was crashing, and, according to the terms of the loan documents, the value of the underlying Duke Realty stock was reduced to zero.  Thus, the value of the collateral was insufficient to cover the loans.  Merrill Lynch therefore requested that Staton Family Investments deposit millions of dollars in additional collateral.  Although the facts of this case aren’t entirely clear, it appears that Staton Family Investments didn’t pay the additional collateral, which in turn led Merrill Lynch to seize the Duke Realty shares.

During the FINRA arbitration, The Staton Family Investment argued that Merrill Lynch had breached its fiduciary duties as an investment advisor by not adequately notifying it of the relationship between the loans and value of the Duke Realty shares.  Specifically, Staton Family Investments were “not made aware of how much the loan was under collateralized under the terms of the loan.”

Although this ruling relates to an unusually complicated investment involving unusually sophisticated investors, the implications of this ruling are far reaching.  When you take out a loan that is backed up by collateral, the financial advisor should explain the terms of the loan as well as what will happen if the value of the collateral falls below a certain point.  Here, Merrill Lynch didn’t adequately explain that to its customer.  That is why they were ordered to pay Staton Family Investments more than $8 million.

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