February 3, 2003
In a press release Monday, Klayman & Toskes P.A., the plaintiff law firm, said the claims filed before the New York Stock Exchange (news – web sites) and the National Association of Securities Dealers seek compensatory damages related to the alleged misuse of option financing programs that used banks affiliated with the brokerage firms.
The suits allege that the brokerage firms recommended to some stock option holders the use of stock-option financing through the affiliated banks, creating a conflict of interest because they stood to profit from the financing plans.
Klayman & Toskes said some Microsoft employees were advised to use their company stock as collateral to secure loans for home purchases. This allowed the customers’ portfolios to increase borrowing power of the accounts while avoiding margin maintenance levels that would trigger a margin call.
Typically, industry standards provide that if the equity-to-margin ratio reaches 30 percent, the securities in the account would have to be sold or additional funds would have to be deposited in the account, the firm said. By financing through an affiliated bank, these requirements don’t apply.
Klayman & Toskes said that because the affiliated bank financing didn’t provide margin calls, some option holders participants saw their equity reduced by up to 90 percent as Microsoft’s stock price declined.
In addition, the law firm said, the claims allege the firms mismanaged their clients’ portfolios because there were option strategies at the time of exercise that would have protected the value of the margined, concentrated portfolio, known as a “zero cost” collar.
Klayman & Toskes said it is pursuing arbitration suits for securities violations including the misuse of option finance programs, the misuse of stock option plans, failure to supervise, unsuitability claims, misrepresentation and material omissions of fact.
Merrill declined to provide immediate comment, while a Salomon spokeswoman wasn’t immediately available.