Two executives who head Merrill Lynch Pierce Fenner & Smith Inc.'s Baltimore operations are accused in a lawsuit of leading an effort to generate excessive commissions from clients by churning their accounts and making unauthorized investments. The lawsuit was filed Thursday by investors.
The executives and seven brokers billed their clients hundreds of thousands of dollars for unnecessary trades, set up "unauthorized" margin accounts, and invested money in high-risk stocks without their clients' knowledge, according to the lawsuit filed in Baltimore City Circuit Court.
Gregory C. Franks, resident vice president for Merrill Lynch, and Lawrence M. Hufty, the office's administrative manager, who was fired this year, are named as defendants in the suit filed by seven clients.
"It is about as egregious case of churning as one can imagine," John H. West III, an attorney representing the plaintiffs, said yesterday.
West and other lawyers are seeking class-action status because they believe hundreds of Merrill Lynch clients may also be involved.
"Some people have contacted us identifying similar conduct in their accounts," West said.
Susan Thomson, a spokeswoman with New York-based Merrill Lynch, the nation's largest brokerage firm, said it was premature to comment because the firm just received the complaint.
Melanie Senter Lubin, deputy securities commissioner for Maryland, said she could neither confirm nor deny "the existence of an investigation."
Franks, who was named head of Merrill Lynch's Baltimore office in January 1994, "recognized that maximizing brokerage commissions would increase his personal compensation and assist in his advancement within the Merrill Lynch organization," the lawsuit says.
Franks fired experienced managers and replaced them with inexperienced managers who would be loyal to him, the lawsuit says. He also recruited brokers and trained them to "wring the maximum possible commissions out of their customers' accounts," the suit says.
One client was Ada Mae Zeiler, newly widowed with accounts worth about $650,000 at the beginning of 1995. By the end of 1996, her investments had fallen to $616,125, despite a rising stock market.
Zeiler took over the family's account in April 1991, after the death of her husband. In July 1994, her broker, Jeffrey Farley, executed $200,000 in unauthorized trades in her account, and $150,000 of unauthorized trades in the first three trading days of January 1995, the lawsuit says.
Between January 1995 and December 1996, Merrill Lynch executed $13.4 million in trades on Zeiler's accounts, charging her $33,075 in margin interest and $147,106 in commissions, according to the lawsuit.
Lawrence F. Monticello, a 69-year-old retired engineer, invested about $125,000 with Merrill Lynch. From January 1995 to December 1996, his broker, Steven G. Griswold, executed more than $2 million in trades in the account, the lawsuit says.
Merrill Lynch charged Monticello more than $42,000 in commissions and $28,000 in margin interest, the lawsuit says.
By February 1997, Monticello's account was worth less than $45,000.
Pub Date: 5/07/97