Merrill Lynch accused of fraud in lawsuit following SEC order
A former Merrill Lynch client accused the firm of fraud, negligence and racketeering in a potential class action lawsuit against the company.
The lawsuit, filed last week in California, came eight months after Merrill agreed to pay $415 million and admit wrongdoing under a settlement with the SEC over the same matter. The regulator alleged the firm misused client funds in leveraged option trades between 2009 and 2012.
San Diego county resident James Jiao accuses the wirehouse of putting his money at risk without his consent, according to the lawsuit filed in San Diego federal court. Merrill allegedly used funds which should have been held in reserve on “a series of increasingly complex trades.”
The trades, called leveraged conversion trades, reduced Merrill’s required customer reserves by up to $5 billion per week, the lawsuit said. Merrill’s clearing banks also held liens over its clients’ securities, another violation of customer protection laws, according to the suit.
Merrill’s actions subjected Jiao and other clients to undue risk in the event of the bank’s failure and deprived them of interest and profits, the lawsuit said. Tens of thousands of former Merrill customers could come forward under the class action if it’s certified, according to the suit.
The wirehouse was hit with sanctions from the SEC and FINRA for disregarding securities rules, misusing clients’ cash and not disclosing product costs.June 23
Meanwhile, the SEC hints that more actions could follow the $425 million in penalties levied against the brokerage firm.June 23
Their attorney said he would instead file claims in arbitration.January 18
The wirehouse agrees to pay a $2.8 million fine after the regulator discovers the bad reporting went on for years.October 19
A spokesman for Merrill rejected Jiao’s allegations, as well as any class action against the firm following its settlement with the SEC.
“As the SEC noted at the time this was resolved, there were no customers harmed in this matter and, as a result, there is no basis for this lawsuit,” the spokesman said in an emailed statement.
Abbas Kazerounian, an attorney for Jiao, says he “respectfully disagrees” with Merrill's position on the case.
“The allegations in our complaint speak for themselves,” Kazerounian says.
Kazerounian hopes to file a motion to make the case a class action in six to eight months, he adds.