02/01/2012 06:28 pm ET Updated Apr 02, 2012

Bobby Hayes Wins $1.4 Million In Suit Against Merrill Lynch Over CDO Loss

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By Suzanne Barlyn

Feb 1 - Bank of America Corp's Merrill Lynch unit must pay nearly $1.4 million in damages to a wealthy investor who alleged that collateralized debt obligations he bought turned out to be worthless at the time of purchase, according to an arbitration ruling.

Bobby Hayes, a Nevada-based retiree and entrepreneur, filed the case in 2011, alleging breach of contract, consumer fraud, and other misdeeds, according to a ruling by a Financial Industry Regulatory Authority panel dated Tuesday.

Hayes' claim stemmed from an investment in risky collateralized debt obligations he bought from the former Banc of America Securities LLC in 2008, according to Thomas Bradley, a Reno, Nevada-based lawyer who represented Hayes in the case. The unit is now part of Merrill Lynch.

Collateralized debt obligations, or CDOs, are securities backed by underlying pools of bonds or loans. The investments, while risky, are "not uncommon" among "qualified investors," who must meet certain net worth and income standards established by the U.S. Securities and Exchange Commission, Bradley said. Hayes, a high net worth investor, met those standards, said Bradley.

Merrill purchased the loans backing the securities between November 2006 and June 2007, according to Bradley. Hayes, of Incline Village, Nevada, argued that the loans lost significant value while held in the company's inventory. But the company sold the loans to Hayes and other investors for the price it paid, instead of what they were worth, Bradley said.

Hayes was unaware that the securities were under water when he bought them, Bradley said. Hayes asked the panel for $883,122 in damages, plus other relief, including legal fees.

The panel awarded Hayes $883,122 in rescissionary damages - a state securities law remedy that allows money returned to an investor in exchange for giving back the securities. The panel also awarded $251,668 in interest and $218,344 in legal fees and $23,500 in costs, according to the ruling.

Merrill Lynch spokesman William Halldin denied that the securities were worthless at the time of sale and said Merrill disagrees with the panel's decision. "Following the purchase of this investment, the market experienced extreme volatility," he said. (Reporting by Suzanne Barlyn and Jochelle Mendonca; Editing by Walden Siew, Phil Berlowitz)