NEW YORK -- A Maryland investor and businessman claiming financial naivete received a $381,000 settlement from Alex. Brown & Sons after an arbitration decision by the New York Stock Exchange that concluded the firm had inappropriately "churned" an investment account.
The exchange's determination against Alex. Brown and an employee, Charles Merrick III, included an additional $12,000 to cover the costs of a six-day hearing. The settlement was less than half of what had been requested by the claimant, Joseph E. Butler Jr., and included no punitive damages. But an attorney for Mr. Butler said it covered all trading losses and commissions.
"We're very upset by [this]," said Alex. Brown Chief Executive A. B. Krongard. "We are upset when any business relationship between Alex. Brown and a client doesn't work out to a client's satisfaction. That doesn't mean we did anything wrong."
The exchange's decision came in early December and was confirmed last month after a request for a reconsideration was denied. It was disclosed yesterday by Richard Kraut, a Washington lawyer representing Mr. Butler.
"He feels he was treated badly and wonders whether publicity will have the impact of informing others who may have been similarly mistreated," Mr. Kraut said.
From 1986 to 1989, Mr. Butler's money was frequently switched among mutual funds, closed-end funds and unit investment trusts that carried large up-front fees and were therefore inappropriate for fast trading, Mr. Kraut said.
"The gist of the complaint," he said, "is that the customer relied on Merrick's advice and the trades had no economic purpose other than to generate commissions and underwriting fees for Merrick and Alex. Brown."
Mr. Butler's complaint was not that Alex. Brown made unauthorized trades on his account.
"We alleged, because of lack of business and financial sophistication," even authorized trades were effectively controlled by Alex. Brown's Mr. Merrick, Mr. Kraut said.
As part of the testimony, Mr. Kraut confirmed, the arbitration panel was told he had been in a serious automobile accident in the 1970s resulting in a coma and brain damage.
Currently, Mr. Butler runs a "very small" aircraft leasing business in Maryland and is a licensed pilot.
"We were extremely disappointed and surprised by the decision of the arbitration panel," Mr. Krongard said. "We concluded that the broker had not done anything wrong, and we vigorously defended his actions.
"My interpretation of the case is it turned on who you believed was generating these changes, whether it was the broker suggesting them or the client insisting on them. We believe our broker. We continue to have confidence in Chuck Merrick, and the fact he's still working for us says this as strongly as we could."
Cases of inappropriate trading are among the most common sources of arbitration hearings at the exchange, said Samantha Rabin of Securities Arbitration Commentator, based in Maplewood, N.J.