CA Arbitrator Dissents To Denial Of Claim

This claim was denied by a panel of three Financial Industry Regulatory Authority (FINRA) arbitrators in Los Angeles, California. That is not unusual at all but one of the arbitrators disagreed with the decision to deny the Claimants’ claim and wrote a very interesting dissent that is worthy of reporting. The case is FINRA# 09-03931; Robert J. Coffey, Individually and as Trustee of the Robert and Lulu Coffey Living Trust, DTD 11/05/2003, Lulu Coffey, Individually and as trustee of the Robert and Lulu Coffey Living Trust DTD 11/05/2003, Robert J. Coffey as Trustee of the Scott P. Keil Trust U/W, FBO Douglas Keil, Laura L. Keil and Valerie Keil v. Merrill Lynch, Fenner & Smith Incorporated.

The claim was filed in June 2009 and the Claimants asserted various causes of action including breach of fiduciary duty, constructive fraud, misrepresentation and omission, breach of contract, failure to supervise and violation of state and federal securities laws, among other things. All causes of action related to multiple investments in Lehman Brothers bonds. The relief sought was $222,142 initially and later amended to $199,959 at the conclusion of the evidentiary hearing.

The six day evidentiary hearing took place in March and July, with one session in September for expungement. The panel went into executive session after the hearing to consider all of the oral and documentary evidence before making its decision. The panel concluded that the Claimants were not entitled to any recovery and their claim was denied in its entirety. The panel also split the $16,875 in forum fees for the arbitration between the parties as follows: Claimant $6,300 and Respondent $10,575.

One of the arbitrators, who was a Public Arbitrator, dissented as to the denial of Claimants’ claim and went on to write an eloquent statement as to why he dissented with the other two members. Among the many facts that caused him to dissent were as follows:

  • The accounts were managed accounts and Merrill was being paid a fee to advise Coffey about the suitability of his investments.
  • Although Coffey was a knowledgeable and engaged investor, his investment objective was always conservative with the goal of preservation of capital.
  • Originally, the Lehman notes met this objective when purchased but by September 2008 they had become significantly more risky.
  • Coffey knew this but is was still incumbent upon the broker, Levin, to properly advise him of the risk so he could make an informed decision to hold or to sell.
  • A broker is not relieved of this responsibility when managing accounts for sophisticated investors.
  • Levin sent Coffey an email on September 11, 2008 saying that the “more prudent course is to wait it out” and he also said that if Lehman were to go bankrupt “bondholders are typically reimbursed while equity shareholders get the short end of the stick.”
  • The email did a disservice by reassuring him about the investment and providing misinformation about the effect of a possible Lehman bankruptcy.
  • What he should have said was that the Lehman notes were no longer a conservative investment and informed him that they could lose a significant portion of their investment or all of the Claimants’ principal.
  • When an investment firm is collecting a fee for its investment advice, it should properly inform its clients in writing of the risks of those investments when circumstances warrant.
  • In this case Mr. Levin failed in his responsibility to Coffey, notwithstanding the fact that he is a talented broker with the best of intentions.

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