Now that Merrill Lynch has been slapped with a $3 million judgment in a case that claims, in essence, "financial malpractice," other Wall Street firms fear they could be next in the firing line, according to sources. And like other cases, such as the Salomon Smith Barney case first reported in Registered Rep.’s February issue, stock option grants are the bogeyman.
"We’re kind of waiting for the hammer to come down," says a UBS PaineWebber rep on the West Coast, echoing the sentiments of several other brokers interviewed for this story. "I think, in light of the Merrill case, that all the firms are shaking in their boots."
As well they should: According to the NASD, there has been a steady increase in arbitration cases involving stock options--over 400 in 2001, compared with around 300 for the previous years.
The PaineWebber broker, who spoke on the condition of anonymity, says that UBS PaineWebber’s legal department is preparing for cases alleging similar "bad financial advice."
PaineWebber declined to comment, as did several other firms. In the case against Merrill, a New York Stock Exchange arbitration panel agreed that Merrill brokers gave it clients, Robert and Karen Weingarten, "negligent advice" regarding "option strategies, concentrated position and tax consequences," according to the NYSE arbitration panel. The couple claimed that they had lost $10 million. The couple did not win the $20 million in punitive damages they sought. Quite simply, says attorney Seth Lipner, a partner at Deutsch & Lipner in Garden City, N.Y., who represented the Weingartens, the couple’s brokers lacked the expertise to properly handle complex stock option issues.
In a published report, a Merrill spokesman strongly disagrees with the arbitration board’s decision. Most firms employ many brokers who specialize in stock option hedging strategies.
Attorneys predict that Wall Street firms can expect to be hit some cases involving employee stock options.
"We're going to see a lot of multi-million dollar awards," says attorney Theodore Eppenstein, a partner at Eppenstein and Eppenstein in New York.