FINRA Sends Warning With $1.7M Decision Against Merrill

Bad news comes in threes for Merrill Lynch advisor Phil Scott.

The Financial Industry Regulatory Authority handed down a $1.7 million award against him earlier this week, the third major disciplinary action he has received since 2011.

All three cases have concerned the suitability of investments that went awry during the market collapse of 2008 and 2009. One of the more high profile cases was a $1.7 million suit brought by former Major League Baseball player Doug Mirabelli, which ended in a decision totaling $872,772.

At issue in the most recent case brought by Clair Couturier and the others is a retirement income portfolio that Scott had invested the entirety of into stocks, according to Barry R. Lax of Lax & Nelville, LLP, in New York, who represented Couturier.

“The problem is that even if you’re in 30 or 35 stocks, when the market gets hit, your portfolio is going to get hit,” Lax said. “And if you’re invested in dividend stocks and dividend stocks start to dry out then you’re going to have a problem. You’re not diversifying your client’s portfolio.”

A call to Phil Scott was redirected to a manager at the firm who was not available by press time to comment. Scott previously denied the allegations in all three cases, defending his investment strategy.

“I carefully selected portfolios for the clients that I reasonably believed would meet their stated need for income and matched their tolerance risk,” he wrote in the summary of a 2011 decision.

In the Mirabelli case, Scott said that the clients had acted against his advice.

“The clients were invested in an income portfolio, per their request, which was suitable for their stated risk tolerances,” his response states. “The clients sold their portfolio at the lowest point in the market against the specific advice of Mr. Scott and his team.”

In its summary of the Couturier cases, FINRA claimed that the products being sold were misrepresented and the Personal Investment Advisory Questionnaire was misused in building out the portfolio. The panel took the decision a step further to say that the firm had violated its own rules with regards to client suitability and detailed all three concerns “so Respondents can modify their conduct accordingly.”

“This wrongdoing was caused by Respondent Merrill Lynch, Pierce, Fenner & Smith Incorporated’s inadequate supervision before the fact and aggravated by its failure to take corrective action after it received notice of the communications,” the panel said in its resolution.

According to Lax, the level of detail and suggestions that the panel included in the finding was “unusual,” and set a precedent for firms to take responsibility for and examine their own practices. “I think it shows no one is above the fray,” he said. “It doesn’t really matter if it was the worst market ever purportedly and clients lost money. The issue is their conduct.”

A spokesman for Merrill Lynch, Bill Halldin, defended Phil Scott’s record, lauding Scott as a distinguished employee of the firm. Scott has been named as the top advisor in 2012 in Washington, according to a Barron’s survey, and managed approximately $1.4 billion at the time of that ranking.

“He’s still with the firm, and he’s had a long and distinguished career as a [financial advisor],” Halldin said.

Merrill Lynch disagreed with the award and stands by Scott’s performance in the face of very chaotic markets, according to Halldin.

“We disagree with the panel's decision given the facts presented in this case,” Halldin said reiterating his comments to On Wall Street earlier this year in the Mirabelli case and noting that the award was half of the $2.5 million originally sought by Couturier. “This account was handled properly during a very difficult time when there was extreme market volatility.” 

Merrill Lynch has not filed for an appeal or to vacate the arbitration yet, according to Halldin.

“We are reviewing the decision,” he said.