[ by Howard Haykin ]

A FINRA arbitration panel issued an award to a broker whom they concluded had been wrongly blamed for mishandling a client's stock sale and then fired.  The panel ordered Merrill Lynch to pay the ex-broker $1.2 million, though the panel also ordered the broker, Barbara Jean Horvath, to repay her former employer some $439,000 related to an unpaid promissory note.  She leaves with a net payout of about $796,000.  The arbitration took place in Los Angeles.

Facts & Circumstances.  The issue began when Ms. Horvath's client excessively transferred funds out of his Merrill account, generating an $11,000 unsecured debit in the account.  The broker and client tried to satisfy that debt by transferring penny stocks into the account, and then selling them.  The penny stocks were sold, but there was a problem.  They were restricted and not eligible for sale.  As a result, the transaction was accounted for as a large short sale, leaving the customer account with a restricted long position in the stock and a large unsecured short position.  

Unable to deliver the restricted shares, Merrill had to go into the market to borrow the shares.  Because the stock is thinly traded, Merrill spent more than $400,000 to buy enough unrestricted shares on the open market to cover the customer's short position, according to case documents.

Ms. Horvath, who has since associated herself with LPL Financial, included her own account of the situation on her broker record, saying the shares appeared on Merrill's computer system as "free trading" and were then sold.  Only later was it determined that the shares were restricted and Merrill had to buy the stock necessary to satisfy delivery, she said.

"I believe the amount Merrill paid to cover the short position was inflated due to Merrill's delay in doing so.  At the time the shares were sold, I was not aware that they were restricted and I relied on Merrill's confirmation that the shares were free trading."  -- Ms. Horvath wrote on her Form U5.

According to Horvath's attorney, Jeff Compton, Merrill put her on administrative leave, during which time she wasn't allowed any contact with her clients, before she was eventually terminated.  He added:  "The real issues were not only the termination, but also the delay in keeping her from her clients for a total of about 10 weeks that prevented her from continuing to service her clients and transfer them to a new broker dealer."   This supposedly caused her to lose much of her business.  The payment that Merrill must pay to Ms. Horvath ($1.2 million) represents compensatory damages,  the amount owed on her promissory note.

Merrill itself initiated the arbitration last year by filing a claim for the roughly $418,000 in principal plus interest.  Ms. Horvath then responded with a counterclaim for damages representing her lost livelihood.

Explanation of Arbitration Panel's Ruling.    It its ruling, the panel noted that Merrill's explanation for firing Ms. Horvath  - allegations she "did not adequately know her customer, exercised time and price discretion and did not fully cooperate" with Merrill's probe - should be amended on her CRD files.  Instead, the defamatory explanation should be supplemented with its own finding that Merrill terminated Ms. Horvath "as a pretext related to internal problems with the handling of certain short sales and penny stock trades."

The panel also ruled that Ms. Horvath's record should be cleared of any indication that she was the subject of a customer complaint alleging a sales practice violation involving $15,000 or more. It was the panel's finding that Merrill was primarily responsible for the situation and that her contribution to the customer's harm doesn't exceed $11,000. 

The panel's decision was dated 10/23/12 and released to the public on 11/5/12.    [Motley Fool, via Smart Money, 11/5/12]