February 3, 2003
By Susan Willetts
Dow Jones Business News
SEATTLE (Dow Jones)–Merrill Lynch & Co. and Citigroup Inc.’s Salomon Smith Barney unit are the targets of four securities arbitration claims filed on behalf of Microsoft Corp. (NasdaqNM:MSFT – News) employee stock option program participants in Seattle.
In a press release Monday, Klayman & Toskes P.A., the plaintiff law firm, said the claims filed before the New York Stock Exchange and the National Association of Securities Dealers seek compensatory damages related to the alleged misuse of option financing programs that used affiliated banks of the brokerage firms to exercise employee stock options.
The suits allege that the brokerage firms recommended to some Microsoft ESOP participants the use of alternative stock-option financing through the affiliated banks, creating a conflict of interest because they stood to profit from the financing plans.
Klayman & Toskes said certain 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%, 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.
A Klayman & Toskes spokesman said that because the affiliated bank financing didn’t provide margin calls, some ESOP participants saw their equity reduced by up to 90% 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.
A Merrill spokesman declined to provide immediate comment, while a Salomon spokeswoman wasn’t immediately available.