Bank America GUILTY of Professional Neglect

It would appear being wealthy doesn't necessarily mean one is wise when it comes down to the 'Who Can I Trust To Manage My Millions':

Jury Finds Bank of America Responsible for Loss of Mayeux's Fortune:

PORTLAND, Maine--(BUSINESS WIRE)--March 20, 2006--A jury in Cumberland County Superior Court today found Bank of America guilty of professional negligence and mismanaging Darrell Mayeux's $27 million dollar nest egg.

Mayeux, a retired Fairchild Semiconductor executive and resident of Falmouth, Maine, hired Fleet Bank's Private Client Group (since acquired by Bank of America) in 2000 after Fairchild's IPO made him wealthy.

The jury found that the bank's failure to provide the financial advice and investment protection it promised at the time of Mayeux's retirement caused the loss of his fortune. A unanimous verdict of nine jurors awarded the couple $7,448,026.00.(emp.mine)

Well, you can pretty much bet this one will probably head straight into appeal. We'll have to wait and see of course. I think its possible this decision will leave a huge footprint on BofA's back for months to come.

After all - they were found guilty of "professional negligence and mismanagement of Mayeux's funds". Do you think others with huge sums of money might get a bit nervous if they were following a similar gameplan?

In my mind, they have been found guilty of exactly the opposite of what a bank is supposed to be in its customers' minds. The following details explain what and how things went sour:

According to Piper, Fleet's investment advisors courted Mayeux and promised him a banking relationship where his investments would be protected.

Fleet convinced him to take out a $4 million line of credit, using Mayeux's Fairchild stock as collateral against the loan, in order to make other investments to diversify his holdings.

The loan required (that) Mayeux's Fairchild stock remain valued at $8 million. Because Mayeux was still employed by Fairchild, he was restricted from collaring the stock. (emp.mine)

I believe you can interpret "collaring the stock" as "purchasing the stock at a given price and at a certain time". If what Piper alleged is true (can we presume it is if BofA was found guilty?), then the promise of a banking relationship where his investments would be protected is in my opinion, the first sign to Mayeux that he should have run the other way.

1. This banking relationship cost Mayeux $45,000 a year for the Private Client Group services plus $144,000 a year in interest on the line of credit.

2. When Mayeux retired from Fairchild in November 2001, he received no contact from Fleet's Private Client Group regarding new investment strategies for his retirement.

3. Because Mayeux was no longer employed by Fairchild, he was free to collar his stocks and could have paid off the $4 million dollar line of credit.

4. Mayeux was given no financial planning advice and months later, when Fairchild's stock fell, his line of credit went out of balance.

5. Fleet ultimately sold all of the shares at historic lows to pay off the loan, leaving Mayeux with a negative net worth.

I have added paragraph numbers for our convenience while we review those paragraphs above.

#1 - This great relationship was costing only $189,000 a year. And the great advice started out with, "Hey - take out a loan for $4million and use it to expand your portfolio and don't worry, we can back it up with stock you don't really own yet" - or so I'm guessing based on the outcome.

#2 - When he retired - I wonder, did he notify them of his retirement?

#3 - Maybe Mayeux didn't collar his stocks because though he might be very smart, he wasn't financially smart - so he hired BofA to be smart for him?

#4 - This is almost always going to happen when you back loans with stocks as collateral. After all - stocks DO fluctuate and almost ALWAYS when you don't own them!

#5 - This one slays me... and for Mayeux, I imagine it probably tore him up as a person. I'm sure the jury felt the same.

Wouldn't it tear you up going from $27 Million to less than zero - in one year?

Curious, I am - I wonder why the award wasn't $27Million plus interest for the loss of income Mayeux could have earned in a simple saving's account?