Broker sold Fannie Mae preferred stock despite risk warnings
- By Bruce Kelly
Bank
of America Merrill Lynch on Tuesday was ordered to pay a $1.3 million
arbitration award to a couple whose broker sold them preferred shares of Fannie
Mae stock, allegedly despite multiple warnings of its risk.
Those warnings included a “sell” rating from
Merrill Lynch's own analysts on the common stock of Fannie Mae, the commonly
used name for the Federal National Mortgage Association.
A three-member Financial Industry Regulatory
Authority Inc. panel in Boca Raton, Fla., yesterday issued the award to the
investors, Michelle Billings, 65, and her husband, Robert, 71.
The two invested
$2.3 million in the Fannie Mae preferred shares in July 2008, two months before
Fannie Mae collapsed and was placed into conservatorship, wiping out the
couple's investment.
Merrill Lynch, Pierce, Fenner & Smith
Inc., the formal name for the brokerage registered with Finra, “is found liable
for breach of fiduciary duty,” and was ordered to pay compensatory damages,
according to the award. The Billingses filed their Finra complaint last year.
“We disagree with the decision,” said Bill
Halldin, a Merrill Lynch spokesman. He declined to comment about a potential
appeal by Merrill Lynch.
“We're happy that the arbitration panel
understood the fiduciary duty and that the broker breached the duty in regard
to Fannie Mae preferred shares,” said Jeffrey Erez, the attorney for the
Billingses.
On July 15, 2008, Moody's downgraded Fannie
Mae preferred stock, and Merrill Lynch removed the shares from its “recommended
preferred list” due to significant concerns about the company, according to the
complaint.
On July 28, the Billingses began buying
Fannie Mae preferred shares, according to the complaint.
“The arbitration panel understood that
investors have the right to make informed decision about the investments that
they make,” Mr. Erez said.
The Billingses repeatedly asked their Merrill
Lynch broker, Miles Pure, to give them research on Fannie Mae, according to the
complaint. Mr. Pure was not named in the lawsuit.
“Despite their repeated requests, [Mr.] Pure
did not provide the Billingses with Merrill Lynch
research on Fannie Mae prior
to the company being placed in conservatorship Sept. 7, 2008, and prevented
them from learning that Merrill Lynch had taken significant recent action and
published recent analysts' reports which reflects its very negative view of the
prospects of Fannie Mae,” the complaint said.
“Contrary to [Mr.] Pure's representations, it
was Fannie Mae or agency bonds and not the preferred shares which enjoyed the
implicit backing of the U.S. government,” according to the complaint. “This
critical distinction was either not understood by [Mr.] Pure or intentionally
ignored by him in his sale of Fannie Mae preferred shares to the Billingses,”
according to the complaint.
Mr. Pure left Merrill Lynch in 2009 and moved
to Morgan Keegan & Co. Inc. He did not respond to a call at 2:15 p.m.
Wednesday seeking comment about the complaint.
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