Tags: FINRA

Timing is everything. Merrill Lynch has been ordered to pay an investor $1.4 million to replace securities that may -- or may not -- have already been worthless by the time they were sold.

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The securities in question were collateralized debt obligations that a Nevada retiree argues were already deeply distressed before he bought them in mid-2007.

By the time he bought them, he says, they were "worthless."

Merrill counters that the securities were fine until later in the year. As such, they disagree with the FINRA arbitrator's ruling, blaming the market for their client's losses.

The firm has been ordered to pay back the $883,000 originally invested, along with interest and attorney fees.

Once again, the logic here is a little obscure and probably relies on facts we don't have.

Were the CDOs sold as "risk-free?" Not likely, or Merrill would have been chastised for that.

Did the firm know that they were already toxic when sold? That's another story.

Just because a security checked out in the initial due diligence check, it can still go bad on the shelf, as it were.

Merrill should have been monitoring everything it was actively selling, and if it was going rotten, they should have moved it away from their retail customers.

And was the investment sold as a deeply distressed opportunity? Again, probably not.

If the original investor had bought the instruments on the theory that they'd already been beaten up, it's his decision and his risk to absorb.

FINRA ruled otherwise, so apparently if Merrill knew they were selling rotten product, he wasn't told.

Tags: FINRA

FINRA, in its annual letter to broker-dealers listing regulatory and examnation priorities, says private placements and enhanced-yield products, remain top concerns, but the list does not stop there.  "Yield chasing," especially if it drives advisors into illiquid assets unable to support investor cash flow needs, along with mortgage-backed securities, muni bonds, non-traded REITs,

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complex and structured products, and private equity placements are all on FINRA's watchlist for 2012. As always, so are life settlements and variable annuities. 

The FINRA list, incidentally, is as useful to RIAs as BDs and their registered reps. While RIAs are unlikely to get into selling mortgage-backed securities and other exotic instruments, it does happen. Scandals involving RIAs, once uncommon, seem to be in the headlines more often since the 2008 financial crisis. Knowing which alternatives are on FINRA's watchlist is wise -- especially if you think FINRA will be regulating RIAs in three years. 

FINRA warns member firms about offloading responsibilities for information-technology security, social media compliance, and other functions to third-party vendors. Though these tasks can be outsourced, a broker-dealer is ultimately responsible to FINRA, of course.

FINRA also said it is seeing instances in which firms are "charging retail investors hidden, mislabeled or excessive fees" -- such as inflated postage bills -- and "recording expenses that are not the broker-dealer’s obligations."

Some firms have tried to write off employees' personal expenses and charge clients to cover it.

Tags: fraud

The SEC has chastised national brokerage firm 1st Discount and its former compliance supervisor for missing the warning signs of a rogue representative running a Ponzi scheme over most of the last decade.

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Michael Park, a Tennessee-based affiliate of 1st Discount, has already pleaded guilty to fraud charges and is now facing an eight-year jail term.

However, the SEC still had questions about how Park managed to hide almost $9 million in illicit deposits coming into what amounted to a Ponzi scheme.

The brokerage firm had some policies in place to monitor reps' business accounts, the SEC determined, but the overall compliance environment was full of holes.

In particular, the regulators blamed Michael Fisher, who was in charge of 1st Discount's "heightened supervision" team at the time, for failing to enforce the rules.

Fisher is no longer with the company, but is looking at a $10,000 fine.

The brokerage firm itself has settled for $40,000.

Tags: fiduciaries | Merrill Lynch

Doug Mirabelli, formerly of the Boston Red Sox, has won more than $1.2 million in damages and fees from Merrill Lynch related to the way the firm handled his account back in 2008.

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On the surface, Merrill handled Mirabelli's account just like anyone else's.

Advisor Phil Scott invested the $880,000 he got from the retired catcher in a portfolio of stocks and then somebody -- the reporting's not clear -- leveraged up the account by about 110%.

Unfortunately, this was in March 2008. Eight months later, Mirabelli's positions were down 44% and Merrill made a margin call to liquidate.

Mirabelli's lawyer argued that Scott breached his "fiduciary duty" by failing to explain how risky the investments were and how the leverage would work. 

This part is also vague, because the portfolio is being variously described as a dividend-heavy income strategy and an "all-growth" strategy.

But the arbitrator took the catcher's side and awarded him $1.2 million in damages, reportedly making him whole.

Merrill argues that "the account was handled properly during a very difficult time when there was extreme market volatility."

I might be stupid, but that sounds about right. It was business as usual at Merrill and a lot of other places. Whether that "business as usual" is right or wrong for investors, you probably have a good opinion already.

A lot of people lost vast amounts of money in the 2008 crash and not all of them blamed their broker.

And Scott is a broker, or this case wouldn't be in front of FINRA in the first place. He's not a fiduciary. 

Whether the investments were "suitable" and adequately explained is another story. FINRA evidently thought they weren't.