Duke Realty (NYSE:DRE)
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5 Years : From Apr 2012 to Apr 2017
Three Merrill Lynch units must pay a total of $8.1 million to a real-estate investment trust executive who alleged the firm improperly seized nearly 1.3 million shares of stock from his accounts.
Daniel C. Staton, former chief operating officer and executive vice president of Duke Realty (DRE), filed the case against Bank of America Corp.'s (BAC) Merrill Lynch & Co., two Merrill banking units and a team of advisers in 2008, alleging they breached their fiduciary duty to him and made unauthorized trades in his account, among other things. Staton Family Investments Ltd. was also a claimant in the case.
The ruling, by a Financial Industry Regulatory Authority arbitration panel, was a partial victory for Staton, who originally sought $300 million in compensatory damages, plus another $900 million under a Florida civil theft law. Staton asked the panel, alternatively, to force Merrill to return nearly 1.3 million shares of Duke Realty stock to his account, along with dividends and other relief.
One of the three arbitrators who heard the case dissented from the ruling, which found the three units liable for breaching their fiduciary duty to Staton. The panel, as is customary, didn't explain the reasons for its decision, entered July 21.
Staton, now chairman of FriendFinder Networks Inc. (FFN), a social-networking technology company in Sunnyvale, Calif., has been involved in real-estate development and other entrepreneurial ventures for more than 30 years. He is also managing general partner of the Walnut Group, a Cincinnati-based private-equity firm.
The case stemmed from an advisory relationship between Staton and a Merrill Lynch team headed by Christopher Dale Jacobs in Indianapolis. The Finra panel dismissed Staton's claims against Jacobs and his team.
Staton, who acquired the stock during more than a decade of working at Duke Realty, never wanted to sell it off because of potentially high capital gains taxes and other reasons, said his lawyer, Martin Russo of Gusrae, Kaplan, Bruno & Nusbaum PLLC in New York. Merrill advised Staton to use the stock as collateral for a loan from a Merrill-affiliated bank, he said. Merrill Lynch Bank USA, one of the units liable in the ruling, ultimately became the lender.
Merrill didn't inform Staton of a "trigger price" at which the lender would consider the stock to have no value, and be able to demand immediate repayment of the loan, Russo said. The situation became dire as the stock price dropped below the trigger of $19 per share during the financial crisis in 2008. Merrill abruptly told Staton to deposit $23 million as collateral, Russo said, and he wasn't able to come up with the money fast enough. The Merrill unit advising Staton then seized the stock as a result and liquidated it, he said, in order to repay its banking unit for the loan.
Merrill said it disagreed with the arbitration decision. "We are very surprised that any award was made in light of the facts of this case," a Merrill spokesman said. He noted that the arbitrators awarded a fraction of the amount Staton originally sought.
"Merrill Lynch Bank USA acted completely within the parameters of its loan agreement to protect the collateral held during extreme market turbulence in October 2008," the spokesman said. Merrill is considering asking a court to overturn the ruling, he said.
The case illustrates the potential conflicts of interest that can arise between registered investment advisers and their affiliated banking entities, Russo said. Some employees at Merrill that made decisions about Staton's account didn't disclose to him that they also did work for Merrill Lynch Bank USA, he said. While they had an obligation to protect their client's assets, the Merrill Lynch unit that serviced Staton's account also has an agreement with the banking unit to protect the loan, according to Russo. Answers to client questions, he said, can "depend on which hat they're wearing."
-By Suzanne Barlyn, Dow Jones Newswires; 212-416-2230; email@example.com