(Dow Jones) An arbitration panel ordered two units of Raymond James Financial Inc. (RJF) to buy back $2.5 million in auction rate securities from an investor.
The Financial Industry Regulatory Authority panel ruled in favor of Greg Merdinger, who filed a claim in June 2009 alleging a breach of fiduciary duty and contract by Raymond James & Associates and Raymond James Financial Services Inc. The panel also awarded Merdinger an additional $86,000, plus 5% interest on the $2.5 million until Raymond James buys back the securities.
Merdinger originally sought $3 million in compensation and $9 million in punitive damages.
Raymond James advised Merdinger, who was acting as trustee for a revocable trust, to purchase auction rate securities starting in October 2006, according to the award dated July 19. Merdinger wanted to invest in money-market funds due to concerns about the economy and liquidity, but Raymond James advised him that auction-rate securities were safer, concealing the product's risks, according to the ruling.
Raymond James was still advising him to buy auction rate securities into February 2008, when the auction market froze, and made one purchase the day after that occurred, Merdinger alleged. The market for auction rate securities remains frozen, leaving many investors stranded.
Copies of e-mails that were considered during the proceeding allegedly showed that Raymond James financial managers knew there were problems in the auction-rate market well before it failed, according to Lawrence Byrne, a securities lawyer in Chicago who represented the investor.
Asked for comment, Raymond James issued a statement from its general counsel, Paul Matecki, who noted that the panel's ruling did not include an explanation, so the basis for its decision cannot be determined. Matecki pointed out that Merdinger was awarded less than he sought, and got no punitive damages or lawyers' fees.
Matecki contended that the company established in the arbitration hearings that it had no advance knowledge that the auction-rate securities market was going to collapse. He said an employee e-mail did refer in passing to the failure of certain auctions backed by subprime and student loans in 2007, which Matecki described as isolated occurrences that did not involve Raymond James products.
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