Unsuitable Investment Advice

James R. Herrington v. Merrill Lynch. Pierce Fenner & Smith, Inc. NASD Dispute Resolution No. 05-05529

In this matter, we represented a retired employee of UPS who held over $ 1.8 million in UPS stock that he had acquired over the years under certain employee stock plans.  Upon retirement, Merrill Lynch approached him and recommended that he diversify his UPS stock by purchasing as “pre-paid forward contract” (a type of contract in which Merrill Lynch would loan him money against his UPS stock in order to make diversified investments in the stock market, with the repayment of the loan to be based upon the price of the UPS stock at the end of a given time period). Merrill’s representative advised that the pre-paid forward contract could be used to hedge against decreases in his UPS stock while simultaneously investing in the stock market without the need to sell the UPS stock, which would generate significant tax consequences.  Our client responded that he did not understand the product and that if he went along with its purchased as advised by the account representative, he would not reinvest in the stock market (given its risk) but only intended on purchasing risk free CDs . The account representative advised that our client should go ahead with the transaction, despite his aversion to risky investments in the stock market.


After presenting Merrill Lynch with audio recordings in which its account representative admitted his lack of understanding of the pre-paid forward contract,  Merrill Lynch settled for a significant sum.