Broker Defense: If It Ain't Broke, We're Not Liable

A Florida jury ruled that Merrill Lynch must pay $6 million for selling unsuitable investments to George Rothman, who was a wealthy New Jersey philanthropist before he died in 2004. The lawsuit was filed in 2000 on behalf of Rothman's trustees, which are his two daughters and Citicorp. The $6 million fine could get even bigger--the jury will decide next week how much Merrill Lynch should pay in punitive damages.

The Rothman trustees accused Merrill Lynch and its broker, Karen McKinley, of taking advantage of his deteriorating mental state and moving his money from tax-free muni bonds into variable annuities, which carry much bigger broker commissions. According to the Bergen County Record, McKinley told the Rothmans they would not pay commissions or fees, when in fact Merrill Lynch collected $2.5 million in fees. McKinley herself took home $600,000 of that.

Merrill Lynch has asked the trial judge to set aside the verdict, according to the paper. If the judge does not, the brokerage will appeal.

But Merrill Lynch's attorneys might not be so happy with comments from the firm's spokesman on the jury's conclusion. "The verdict is astonishing in light of the undisputed fact that the Rothmans, who were wealthy, sophisticated investors, made $10 million on the annuities at issue, and did not lose money," said Merrill Lynch spokesman Mark Herr.

So, in other words, you can't sue us for selling you unsuitable investments if those investments made you money? What's $2.5 million when you make a $10 million return? The P.R. machine might want to work on that one.

And then there's the matter of Karen McKinley's record. Based in Palm Beach, Florida, McKinley has been with Merrill since 1983. According to her record with the FINRA, which regulates securities brokers, arbitrators ordered Merrill Lynch pay a McKinley client $538,086 in 1997 for unsuitable investments and account churning.

And then again in 2002, Merrill Lynch paid $21,661 to settle claims that McKinley made unsuitable investment recommendations to a client.

And those are just the ones we know about. A recent study by the Public Investors Arbitration Bar Association showed that FINRA expunges the records for many arbitration settlements made by brokers. The group found that 71 percent of arbitration settlements made during 2006 were not required to be part of the brokers' public records.

by Megan Barnett