Merrill Lynch Ordered to Pay $3.68 Million for Unsuitable Private Equity Recommendations

Merrill Lynch, the wealth management division of Bank of America, has been ordered to pay a total of $3,684,163 in damages and other costs following a complaint related to unsuitable private equity recommendations. The decision was made by a public panel of arbitrators, who ruled in favor of two customers, Qun He and Haihui Zhang, who had filed the complaint in late 2023. The arbitrators determined that Merrill Lynch violated securities laws, industry standards, and its fiduciary duty, and acted with negligence and negligent supervision. The firm was also found to have breached its contract related to various unspecified securities.

The arbitrators awarded the claimants $2.73 million in compensatory damages, $2,002 in costs, and $954,634 in attorneys’ fees. The complaint alleged that a broker recommended investments in illiquid proprietary feeder funds sold by Merrill, which pooled capital into private equity investments overseen by institutional investors. The recommended funds were advertised as having potential annual returns of 15% to 20%, but ended up recording annual returns around 3% after subtracting private equity fees and administrative charges from Merrill.

Michael Bixby, the Florida attorney who represented the two customers, expressed satisfaction with the result, stating that it reflects the arbitrator’s decision that Merrill was responsible for misconduct and held them accountable. The case was heard by the U.S. Financial Industry Regulatory Authority (FINRA), which made an independent arbitration forum available for the dispute. Merrill Lynch denied the allegations throughout the proceedings.

This ruling underscores the importance of due diligence and transparency in financial advisory services. The arbitrators' decision highlights the potential risks associated with private equity investments, particularly when recommended by brokers without adequate disclosure of fees and administrative charges. The significant disparity between the advertised returns and the actual returns experienced by the claimants further emphasizes the need for accurate and transparent communication between financial advisors and their clients.

The outcome of this case serves as a reminder to financial institutions about the consequences of failing to meet their fiduciary duties. It also underscores the role of regulatory bodies like FINRA in ensuring that investors are protected from unsuitable investment recommendations. The decision to award substantial compensatory damages, costs, and attorneys’ fees reflects the severity of the misconduct and the impact it had on the claimants.

Moving forward, this ruling may influence how financial advisors approach private equity recommendations and the level of disclosure required for such investments. It also sets a precedent for future cases involving similar allegations, reinforcing the importance of adhering to industry standards and regulatory requirements. The case highlights the need for financial institutions to prioritize client interests and ensure that investment recommendations are suitable and transparent.