Merrill Lynch Loses $1 Million Court Case

Merrill Lynch, Pierce, Fenner & Smith, Inc. has been ordered by an arbitration panel of the National Association of Securities Dealers, Inc. to pay more than $1 million to Gary and Lisa Friedman, including punitive damages, on the Friedmans' claim that Merrill Lynch hid conflicts of interest and issued fraudulent analyst reports and ratings in order to boost the firm's investment banking revenue.

According to the award, the arbitration panel found "clear and convincing evidence" that Merrill Lynch was "guilty of intentional misconduct in that they had actual knowledge that many of the companies for which they were issuing and/or maintaining ratings of 1, 2 or 3 during the relevant period of time were, in reality, overvalued by this rating system." Further the panel found that Merrill Lynch manager, "knowingly condoned, ratified and consented to the conduct of its employees."

The Friedmans were represented by Boca Raton, Florida securities attorney Robert W. Pearce who argued that all of Merrill Lynch's research analysts were conflicted by the firm's flawed business model.

The Friedmans, who did not own any of the securities identified in New York Attorney General Elliott Spitzer's investigation or the global settlement reached with Wall Street firms in 2003, received a seven-figure award with Mr. Pearce's assistance.

"The Merrill Lynch fraud was not limited to its Internet sector research analysts," said Pearce. "It was clear that Merrill Lynch used all of its analysts, securities reports and ratings as marketing vehicles to bolster its investment banking business."

This ruling also represents one of few cases in which punitive damages have been awarded in any analyst case and is one of the rare instances in which a $1 million+ award has been issued.

"This is the largest punitive damage award we have seen in a research analyst case and has significant findings of fact," said Rick Ryder, publisher of Securities Arbitration Commentator, Maplewood, NJ, which tracks awards in the securities industry. "This case will provide encouragement to investors who have filed similar claims to pursue them. It also creates a path for others to follow regarding how to prepare and present a compelling research analyst case."

Pearce stipulated this was a pure Merrill Lynch research analyst conflict-of-interest case and that there were no other issues involved. "The fact that part of Merrill Lynch analysts' compensation was based upon the performance of the investment banking division is a blatant conflict of interest that was never disclosed to clients," said Pearce. "Individual investors across the country lost billions of dollars because Merrill Lynch and other firms used analysts to pad their own pockets and benefit their investment banking clients instead of their retail clients."

A complete copy of the NASD Award can be found at

You may like these other stories...

Camp Hopes Estate Tax Will Be on Its Way OutAn article in Bloomberg said that Republicans are considering voting this year to repeal the U.S. estate tax, according to House Ways and Means Chairman Dave Camp (R.-Mich.). He...
Senate Takes Different Approach from House for Highway and Bridge FundEarlier this week, according to a New York Times article, the Senate agreed to fill the coffers of the fund that pays for highway and bridge repairs with...
There it stands, your client's 100-year-old, rickety, vermin-infested barn or former hotel or whatever the darn thing once was. And she's considering what to do with it. There are two words that can help her decide...

Upcoming CPE Webinars

Aug 5
This webcast will focus on accounting and disclosure policies for various types of consolidations and business combinations.
Aug 20
In this session we'll review best practices for how to generate interest in your firm’s services.
Aug 21
Meet budgets and client expectations using project management skills geared toward the unique challenges faced by CPAs. Kristen Rampe will share how knowing the keys to structuring and executing a successful project can make the difference between success and repeated failures.
Aug 28
Excel spreadsheets are often akin to the American Wild West, where users can input anything they want into any worksheet cell. Excel's Data Validation feature allows you to restrict user inputs to selected choices, but there are many nuances to the feature that often trip users up.