“Merrill Lynch & Co. was ordered to pay a Pennsylvania couple $7.7 million in one of the largest awards to individual investors by a securities firm,” writes Susanne Craig in today’s Wall Street Journal.

“A private arbitration panel ruled that Merrill Lynch didn’t advise Douglas and Deborah Millar on strategies to protect the value of their investment in Internet highflier FreeMarkets Inc. and failed to execute an order they placed to sell half of their stake before the stock tanked.”

“The arbitration ruling is unusual, and could have ripple effects beyond this case, because the couple had total control over investments in their account — meaning they had to approve every transaction rather than leaving decisions to the broker. In most arbitration cases that firms lose, brokers typically have investment discretion and are found to have made bad or inappropriate investments not in their client’s interests.”

“As a result, a decision that holds brokerage firms at least partly responsible for losses in accounts where clients make the decisions could lead some financial firms to re-examine the way they handle the assets of clients who control their own investments.”

“One of the three arbitrators hearing the case disagreed with the award, saying in a brief dissenting opinion that Merrill Lynch had no legal liability because of its ‘limited role’ in handling the Millars’ account, in large part because the couple controlled the trading activity.”

“However, Mr. Millar, who owns a travel agency in Pittsburgh, says, ‘Merrill absolutely refused to acknowledge any responsibility in this mess, and the arbitration panel was as outraged as I had hoped they would be.’ “

“Merrill Lynch says the award is ‘outrageous,’ contending that the Millars never placed a sell order with the firm. ‘Somehow, these arbitrators looked past that fact and are attempting to hold us responsible for not executing a sell order that was never given,’ a spokesman added. Merrill Lynch has filed an appeal in U.S. District Court in Pittsburgh. Arbitration awards are rarely overturned because courts can’t review the facts in an arbitration case but can reverse decisions only for exceptional reasons, such as finding that an arbitrator acted improperly.”