NEW YORK An arbitration panel this week took the unusual step of rebuking Merrill Lynch's oversight of a top broker's use of marketing materials and disclosure documents, and awarded a client $1.6 million in damages, attorneys' fees and other costs.
In a December 11 ruling, a three-person Financial Industry Regulatory Authority panel in Seattle wrote that it was spelling out specific abuses by Merrill and a broker known as Phil Scott in order to give them "the benefit of the panel's conclusions so (they) can modify their conduct accordingly."
FINRA panels rarely disclose the reasons for their awards.
The Seattle panel said Scott, whose real name is Walter Schlaepfer, distributed marketing material containing misrepresentations and omissions and used a personal investment advisory questionnaire filled out by brokers as "a disclosure device," a practice that has the "capacity to deceive."
Merrill, a unit of Bank of America Corp, breached its own code of duties in inadequately supervising Schlaepfer and allowing him to use the marketing materials after receiving notice about them, the panel members wrote.
Barry Lax, a New York-based lawyer who represented Schlaepfer's client, Clair Couturier, said it was the third arbitration award of around $1 million he has won against Merrill since mid-2011 for actions involving the broker.
Schlaepfer was not named as a respondent in the other two cases, according to FINRA documents. The three cases accused Schlaepfer of making inappropriate investment recommendations in the years 2008 and 2009 that led to portfolio losses by the investors.
"We disagree with the panel's decision given the facts presented in this case," Merrill spokesman Bill Halldin said of the Seattle decision. "This account was handled properly during a very difficult time when there was extreme market volatility."
He declined comment on whether Merrill will appeal the decision but said Schlaepfer has had "a long and distinguished career as a financial adviser."
Schlaepfer, who remains at Merrill, could not be reached for comment. He is based in Seattle and under the name Phil Scott was honored in 2010 as Barron's Number One adviser in the state of Washington. He was also on the publication's top 1,000 U.S. financial advisers list this year.
Couturier asserted breach of fiduciary duty, violation of suitability standards and breach of contract among other claims against Merrill and the broker in the most recent case. The arbitration panel awarded him less than half of the $2.5 million in compensatory damages he requested.
In January, Merrill was ordered by a Detroit-based panel to pay about $1.2 million to former Boston Red Sox catcher Douglas Mirabelli and his wife over alleged recommendations made by Schlaepfer. In May 2011, FINRA arbitrators in New York ordered Merrill to pay $1.6 million in damages and attorneys' fees to clients of Schlaepfer.
Another arbitration filed against Merrill and Schlaepfer in Seattle, which sought unspecified damages, was dismissed by a FINRA panel in August, 2011.
The latest arbitration decision was reported earlier on Wednesday by Dow Jones.
(Reporting By Jed Horowitz; Editing by Tim Dobbyn)