Merrill Hit with NASD Complaint

Law firm Klayman & Toles said that the NASD complaint accuses Merrill Lynch of recommending the former Microsoft worker borrow in order to buy the shares, which the complaint said inappropriately concentrated the worker’s portfolio in a single equity position, Reuters reported. The law firm said the claim seeks compensatory damages “directly related to the unsuitable use of leverage” to exercise the options.

In similar actions related to the Microsoft options program, a Microsoft employee won a January 2005 victory against UBS/PaineWebber over the quality of investment advice the employee received from the Wall Street firm (See  Microsoft Employee Gets Over $220k for Bad Investment Advice ).  The participant in the stock option plan won a total of $237,338, which is the amount that could have been saved if UBS had implemented a hedging strategy known as a “zero cost collar” for the participant’s investment in Microsoft stock, according to a press release from the participant’s law firm.

A “zero cost” collar is the sale of call options, and, with the proceeds from the sale, the purchase of put options. This creates a range of value – or a “collar” – that a portfolio can maintain, despite possible fluctuations in a stock’s value.