Who’s to Blame? Ex-Merrill Brokers Win Expungement of Structured Notes Complaint

Two former Merrill Lynch brokers won expungement of a customer complaint over unsuitable sales of structured products in a case that focused on the degree to which brokers should bear responsibility for the sins of their firm, according to a Financial Industry Regulatory Authority arbitration award.

George Ewins and Richard Kowalski, a pair of Vermont-based brokers who took a parting shot at Bank of America-owned Merrill when they joined Raymond James & Associates in 2016, were not responsible for their former employer’s “failure” to properly disclose fixed costs with its Strategic Return Notes product that led to steep losses for some investors, a sole non-industry arbitrator said in an award finalized Thursday.

The volatility-linked notes, which had a 2% commission and .75% trail, were billed as low-cost investments in firm marketing that was “materially misleading,” the Securities and Exchange Commission said in reaching a $10 million settlement in 2016 with Merrill Lynch. Finra fined the firm $5 million over the same disclosure issues.

Merrill brokers sold around $150 million worth of the notes to around 4,000 customers, according to the SEC settlement.

The arbitrator said that he found that the brokers “testified credibly that they performed necessary due diligence before they recommended the Strategic Return Notes for the customers.”

“[N]either Ewins nor Kowalski was responsible for the failure of Merrill Lynch and BOA to make the requisite disclosures concerning the fixed costs associated with the Strategic Return Notes,” the arbitrator wrote. “There is no reason to conclude that either Ewins or Kowalski could have reasonably questioned the validity, accuracy and completeness of the Strategic Return Notes offering materials prior to the SEC and FINRA actions.”

The unidentified customer in Ewins and Kowalski’s case had alleged that between September 2010 to April 2014, they placed around $200,000–10% of their net worth–into the products at the brokers’ recommendation, according to the award. The firm settled the claim for $115,000 of the $225,000 in damages requested, according to their BrokerCheck records.

The customer said in a letter submitted to the Finra panelist that they did not have a problem with the expungement if the brokers met their burden of proof but left it as an open-ended question to the arbitrator as to what degree of responsibility the brokers should hold.

“Merrill Lynch and Bank of America were the originators of the SRN but do their agents/advisors hold any responsibility or are they exempt as it relates to the sale of this investment and related defects that were in the SNR (sic)?” the customer wrote. “It is understood they were agents for Merrill Lynch but as licensed professionals there are responsibilities and obligations that come with that as well.”

The brokers’ lawyer, Robert J. Moses of New York City-based law firm Lax & Neville, said the decision is likely to hearten others who may have product failure cases on their records.

“My clients did everything they could,” he said. “They read the documents, they did all the requisite due diligence and spoke to the banking people who put it together.”

Ewins and Kowalski, who now run EKS Wealth Management at Raymond James in Burlington, VT, did not respond to a request for comment on the award.

Ewins began his brokerage career at Merrill in 1994, according to BrokerCheck. Kowalski had started his at E.F. Hutton in 1987 and joined Merrill in 1989, the database said.

They filed their expungement claim in July of 2020 and named current employer, Raymond James, as respondent. Raymond James did not oppose the request and did not participate in the hearings, according to the Finra award.

A spokesman for Merrill Lynch, which was not named as a respondent to the expungement request, declined to comment.