Welcome to Financial Advisor IQ
Follow

Merrill Lynch Asks Court to Toss Class-Action Alleging "Misleading and Deceptive" Marketing

By Miriam Rozen February 1, 2019

Wirehouse Merrill Lynch has asked a federal court to toss a proposed class-action lawsuit in which a Merrill Edge client alleges the firm “misleadingly and deceptively markets” its Maine 529 college-savings program, known as NextGen.

Thomas Baldwin, the client who filed the lawsuit, invested in the college savings program without consulting a Merrill financial advisor but by purchasing shares directly online. In his lawsuit, Baldwin alleges the wirehouse marketed on its website the 529 plan as providing the same benefits to New York State income tax payers as those enrolled in its New York 529 program.

In its Jan. 31-filed motion to dismiss the lawsuit, Merrill argues the suit fails to state any federal causes of action and only makes allegations related to Maine and common laws. The federal Securities Litigation Uniform Standards Act bars plaintiffs from pursuing class actions if they have no federal causes of action, Merrill’s lawyer, Jeff Goldman from Boston offices of Morgan Lewis & Bockius, argues in the motion.

With its motion, Merrill also counters Baldwin’s characterization of how it markets its college plan on its website.

“Baldwin’s claims of misrepresentation are disproved by the very ‘screenshots’ of Merrill Lynch’s webpages that Baldwin includes in his complaint,” Merrill’s motion states. “Those screenshots conspicuously caution the reader, in a bolded box in the very center of the page, that: NextGen provides certain state tax benefits only to residents of the state of Maine. If you or the intended beneficiary are not residents of the state of Maine, you should consider whether your home state or your beneficiary’s home state offers any state tax or other benefits that are only available for investments in that state’s Section 529 plan.”

In his lawsuit, Baldwin alleges Merrill “engages in this deceptive conduct to entice consumers to enroll in its Maine 529 Program instead of other plans it does not manage.” Its marketing approach “enables Merrill Lynch to earn fees, including management fees” and “seems to be working,” according to the lawsuit, signed by Baldwin’s lawyer Benjamin Donahue of Portland, Maine’s Hallett Whipple Weyrens.

Merrill’s Maine 529 Program in the past five years has experienced 36% asset growth, according to the lawsuit, which cited a Portland Press Herald report.

“Merrill Lynch has been handsomely rewarded for its services with around $40 million in annual management fees,” the lawsuit states.

The lawsuit focuses on the marketing and explanatory materials for the Maine 529 program that are made available to Merrill Edge users, or Merrill Lynch’s self-directed investors. Those materials have led to unfair trade practices and negligent representation, the lawsuit claims. For other similarly situated NextGen 529 investors, the lawsuit seeks damages for losses they incurred as a result of putting their college savings into the Merrill Lynch plan rather than other alternatives.

Previously, FA-IQ reported that Merrill Lynch agreed to pay $19 million in restitution over alleged failures in supervising its agents who were opening 529 college savings plans in the state of Maine. Citing a Portland Press Herald article, FA-IQ reported that Maine’s state regulators alleged Merrill Lynch let agents put investors into a plan, known as the NextGen program in Maine, into Class C shares; Merrill Lynch earned more in fees from Class C shares than Class A shares, but Class C shares are designed for investing with a shorter time horizon, according to the state, the Press Herald writes.

(Getty)

The wirehouse had detected the inappropriate allocation itself and reported it to Finra, according to Bill Norbert, a spokesman for the Finance Authority of Maine, the Press Herald reported. FAME is the administrator of the NextGen program in Maine, according to the Press Herald.

The NextGen fund only offered the long-term-geared class of shares until 2006, Judith Shaw, the administrator of the Maine Office of Securities, which issued the consent order, told the Press Herald. Merrill Lynch didn’t have a system to match the age of the beneficiary to the class of the investment once a second share class was added to the fund, according to the Press Herald. But that supervisory failure on the part of the wirehouse has since been fixed, Shaw told the Press Herald.