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DJ Merrill Loses $2M to Two It Says Copied Film Exec Picks

3/6/2003

Dow Jones Newswires

Merrill Lynch & Co. (MER) lost $2.14 million in an arbitration case to two Los Angeles brothers who the firm claims tried to mirror the trading strategies of Hollywood director Michael Bay.

The brothers, Aleks and Michel Horvat, accused the firm of churning their accounts and placing them in unsuitable stocks, including Broadcom Corp. (BRCM) and PMC Sierra Inc. (PMCS). Merrill claimed the two knowingly embarked on an aggressive trading strategy with a single purpose: to copy the successful portfolio of their high-profile friend Bay, a Merrill client and the director of “The Rock” and “Pearl Harbor.”

Ultimately, paperwork appeared to be much of Merrill’s undoing in the case. Its own internal documents showed the men as having moderate risk profiles. It didn’t have signed permission from Michel Horvats to engage in discretionary trading, which allows a brokerage to buy or sell stock without first consulting the client. In addition, a broker who didn’t have authority to make discretionary trades ended up handling much of the activity in their accounts, said the brothers’ lawyer, Robert A. Uhl, of Adikoff & Uhl in Beverly Hills, Calif.

Merrill and the Horvats disagree on what was discussed orally when their accounts were first opened in 2000. Aleks, the former publisher of several Hollywood directories, such as the Producers Directory, claimed that he made it clear when he invested approximately $5 million with Merrill in March of that year that he couldn’t take significant risks with the money because he had a $1 million tax liability from the sale of his publications due in April 2001. His brother Michel, a real estate developer, claims that he told Merrill that he was even more conservative than Aleks because he had less money to invest.

According to arbitration documents, Merrill countered that Aleks Horvat never said he couldn’t risk his principal investment, and his brother Michel never claimed to be even more conservative. Instead, it claimed the brothers were fixated on following the same investing strategies that had been successful in their friend Bay’s Merrill account.

That strategy was an extremely aggressive one, and had a lot to do with Bay’s own analysis and decisions, which were in turn implemented by the same team of brokers the Horvats hired, Merrill claimed in arbitration documents. The firm said during the hearing that both men knew they were in aggressive portfolios and Aleks paid close attention to the day-to-day transactions that occurred. Ultimately, the Horvats and Bay’s portfolios incurred losses from those strategies, according to arbitration documents.

The Horvats’ plan to mirror Bay’s strategies couldn’t have come at a worse time: Their tech-heavy portfolios took a beating as the overall market, and particularly the technology sector, declined. Aleks opened his account at Merrill on March 20; Michel opened his in early July. The market peaked the same month Aleks gave Merrill his millions, and its decline hasn’t stopped since. Both brothers exited Merrill by the end of 2000.

Although the brothers and Merrill disagree on the discussions that took place when the accounts were open, the paperwork Merrill kept was incomplete. Besides never changing the brothers’ risk appetite from moderate to aggressive in its internal documents, Merrill also traded on a discretionary basis in both accounts, even though only Aleks had granted the firm written permission – allowing Michel to claim that many of the trades in his account were unauthorized. In Aleks’ case, the written permission didn’t extend to the broker who ultimately made many of the discretionary trades – and under Merrill’s own compliance rules, that broker shouldn’t have been making those trades, because he hadn’t been with the firm a minimum of three years, said the Horvats’ attorney, Uhl.

In addition, the pair presented an expert witness who testified that the style of trading used by Merrill in their accounts probably wasn’t suitable for any investor, because it depended on quick sales of stocks that increased in value but kept shares of declining stocks lingering in their portfolios.

Uhl, the Horvats’ attorney, said that the Horvats were clients of Merrill’s Capital Strategies Group, a team of brokers that operated in an office that was distinct from the firm’s main Beverly Hills branch.

“This is typical in this industry, that these private little groups are fiefdoms unto themselves, and they rarely get the kind of supervision that ordinary brokers get,” Uhl said.

The Horvats sought $2.9 million in compensatory damages, with Aleks claiming he lost $2.64 million and Michel claiming $261,000. Aleks was awarded $1.88 millionand Michel was awarded $253,000 by the arbitration panel, which made the award last month and released the documents this week.

A Merrill spokesman said in a statement that “Aleks was an extremely aggressive technology investor who sought to capitalize on the technology boom. When the market turned down, he, as most tech investors did, lost money.”


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