Case spotlights sophisticated investors

Investor's glasses on reports.

In what seems like case number 500,392 of investor vs. the banks, we turn our attention to Merrill Lynch. The firm, which is now owned by Bank of America, is being sued by ordinary investors. Actually, wealthy ordinary investors, who lost millions of dollars after buying some complex pools of mortgages that went bad. Those pools are said to have contained some of the lowest-graded mortgages in Merrill's portfolio. And the people who bought 'em were allowed to do it because they were considered sophisticated investors. That term -- and what it means -- is more important than you might think.


By Jeremy Hobson

To be considered a sophisticated investor you need a lot of money -- $5 million in the case of the Merrill Lynch investments.

"People who are not sophisticated in the way the investment world works are wrongly classified," says Ted Eppenstein, a securities fraud lawyer in New York.

Eppenstein says just because a bank is dealing with someone who ought to know what he or she is doing doesn't give it the right to sell a package of extreme risk without full disclosure.

"We've represented a dentist from Italy, funeral home directors in New York, a cookie salesman from France -- all in cases against Merrill Lynch," says Eppenstein. "So you can come from a very broad range of backgrounds, you can be well educated, and you can still be taken by the pitch of the salesman."

In fact, many of the nation's top financial minds have admitted they don't understand these collateralized debt obligations. Then again, no one forced these so-called sophisticated investors to buy anything. Business litigator Mark Zauderer says both sides share some blame.

"The sophisticated investor has a higher degree of responsibility to make judgments about the quality of the investment," said Zauderer. "But you have to ask yourself, what is an investor to do when the brokerage firm's not disclosing, if that happened, some of the risks that are not highlighted in the material?"

Merrill Lynch says each of its investors signed a short document, saying they understood the risks involved. Still, Congress may raise the bar for who has access to the riskiest investments in its new financial reform bill.

About the author

Jeremy Hobson is host of Marketplace Morning Report, where he looks at business news from a global perspective to prepare listeners for the day ahead.

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