A former Merrill Lynch broker is suing the firm and a former client over what he alleges was a "frivolous" complaint settled without his notice or consent.
Joe P. Montgomery, now of Lake Jackson, Texas, was once a rookie in the Tucson, Ariz., Merrill Lynch branch and left the firm voluntarily in May '94 for other brokerage employment. Several months following his departure, Merrill Lynch received a hand-written customer complaint against Montgomery stemming from a client's investment loss in the Hyperion Term Trust, an initial public offering underwritten by Merrill Lynch. The firm settled with the client for $25,000, and filed an amendment to Montgomery's U-5 employment record, triggering an automatic inquiry by the NYSE. The stock exchange took no disciplinary action against him.
However, the settlement then went on Montgomery's CRD record--the only mark he has. The CRD wording reads that Merrill settled to "avoid the costs and uncertainties of arbitration and to preserve good client relationships."
(Per NASD reporting rules, settlements do not go on firms' records.)
Montgomery filed an arbitration claim this February against Merrill and his former client, alleging that the customer's complaint against him was frivolous and involved a faulty product the firm had promoted widely as a "widows and orphans" fund. He asserts he instructed all of his clients to sell out of the fund when Merrill Lynch downgraded it, but that this particular client refused. Furthermore, Montgomery asserts, Merrill Lynch never notified him of the complaint, nor of the settlement.
If notified, Montgomery claims he would have been able to defend his actions. Montgomery, who is now employed with a credit union, maintains that because of the amended U-5 form, he has suffered "severe prejudice" and limited job prospects. He seeks to have his U-5 record amended and to recoup legal expenses.
"It's basic fairness," says his attorney, Jonathan Schwartz in Marina del Rey, Calif. "This is not a suit brought for the purpose of making money. We want a declaration that Joe did no wrong that will go on the CRD and cancel out the original problem."
A spokesperson for NASD arbitration says while there is no specific NASD arbitration rule requiring firms to notify brokers of complaints or prearbitration settlements, as a matter of practice, firms usually do notify reps and former reps to gather more information on a customer complaint, he says.
While it is rare for brokers to name clients as respondents in arbitrations, securities attorneys say it's an option if a broker believes he's been the subject of a frivolous complaint. "I think that's absolutely right," says Peter Till, an attorney specializing in white-collar crime in New York City. "You're saying the client is a liar."
A Merrill Lynch spokesperson was unable to locate any information on Montgomery's claim or to comment on it by press time.