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NOTICE TO MICROSOFT EMPLOYEES HOLDING STOCK: National Investment Fraud Lawyers KlaymanToskes Pursues Claims over Microsoft Stock Option Advice

November 9, 2003

National investment fraud lawyers KlaymanToskes seeks Microsoft employees who feel the brokerage houses that handled their stock options gave them a bum steer after the market crash of 2000, costing them millions of dollars. KlaymanToskes alleges that employees of the software giant could claim that they received bad financial advice from their margin or brokerage firm based on “the contention that brokerage firms are under a duty to provide only suitable investment advice to their clients.”

What Type of Stock Awards Can You Receive?

Per FINRA’s Investor Insights, Stock options and restricted stock units (“RSUs”) are among the most common types of equity compensation. An employee stock option is a contract that grants an employee the right to buy shares in his or her employer at a specific, fixed price, known as the exercise price, after a designated date. A RSU, in contrast, is a unit of stock that an employee possesses with limited ownership rights—for instance an employee may receive dividends equivalents for his or her RSUs but won’t have the ability to sell the RSUs until a certain date has passed or until a certain condition is met.

FINRA notes that that it is common for executives to receive performance-based equity awards, meaning that their stock options may only be exercised, or they only receive full ownership of their RSUs, once certain performance goals are met. For rank-and-file employees, performance-based equity awards are more unusual.

FINRA also notes that companies can use awards that vest over a certain time period as an incentive to retain employees. Vesting is contingent on an employee remaining with the company, with RSUs or options vesting gradually over time. Sometimes vesting doesn’t begin until a person has been employed with his or her company for a year or more. For instance, following the one-year anniversary of employment, the employee may see his or her stock award vesting on a monthly basis. Sometimes, the timeline can be much longer.

KlaymanToskes Pursues Microsoft Stock Options Claims Against Merrill Lynch

In 2001 and 2002, Microsoft employees filed $100 million in securities claims against Merrill Lynch and Salomon Smith Barney, many still pending. KlaymanToskes led the charge — and is now pursuing a “second wave” of claims that the law firm is helping create.

In a press release issued about the claims, KlaymanToskes noted that one pending claim seeks $10 million for alleged misconduct at the Seattle and Wenatchee offices of Merrill Lynch.

The upshot of the complaint — and others like it, which are filed with the New York Stock Exchange and the National Association of Securities Dealers — is that Merrill Lynch failed to advise Microsoft employees to buy other stock.

In the days of the dot-com boom, the Redmond software maker’s stock was considered a sure thing that could only go up in price. As a result, the brokerages loaned money to many Microsoft employees to buy company-issued stock options — using the value of the options as collateral.

Many employees then held onto the stock without investing in anything else. By December 2000, after Microsoft shares plummeted below $40, those who had borrowed were wiped out — something that shouldn’t have happened, Klayman said. “You would not use leverage on a concentrated position,” Klayman said. “It defies economic theory.”

He added that Merrill Lynch has a desk brokers can call for advice on clients who hold primarily one stock. “It was free and available,” Klayman said of the service. “It was just a matter of being lazy and negligent.”

Merrill Lynch’s Response to the Claims

Merrill Lynch spokesman Bill Haldin said the brokerage disagrees with the claims. Merrill provides clients with extensive explanations about borrowing money to buy stock, Haldin said. Despite the company’s advice, he added, it’s ultimately up to investors what they do with their holdings.

The Dangers of Employee Stock Option Concentration

In its Investor Alert, FINRA advised investors about the dangers of owning too much of company stock in your 401(k), which is copied herein below:

  • Determine your total exposure to company stock. Be sure to include stock options, pension plans, employee-directed stock purchases and company matches in your total. You may have additional exposure to your company’s stock through mutual funds in which your company is part of the investment mix. Many investors didn’t know how fully exposed they were to technology and Internet stocks until the bubble burst in 2000 and they saw declines not only in their individual stock holdings, but in mutual funds that had investments in these same companies. If your company stock holdings exceed 20 percent of the value of your total investment portfolio, you may wish to consider redistributing your assets across a broader spectrum of investment.
  • Know the restrictions, if any, on buying and selling company stock. The more of your portfolio you have tied up in company stock with restrictions, the more risk you incur.
  • Read your company’s key SEC filings, including annual reports (10-K), quarterly reports (10-Q) and reports of material events (8-K).
  • Use metrics such as beta—a measure of the volatility of a stock relative to an overall market index during a given time period—to evaluate the level of risk your company’s stock carries. Employees whose company stock is subject to significant volatility or whose company scores high on other risk measures should be particularly wary of investing too large a percentage of their investments in company stock.
  • Read analyst reports and other information from third-party sources to evaluate the short and long-term prospects of your company’s stock performance. Don’t rely solely on your employer’s advice or guidance for why you should invest in company stock.
  • Maintain reasonable expectations of the performance of your company’s stock. Striking it rich is hard to do, no matter how dominant or successful a company is. All companies, even the most successful, have their ups and downs.

KlaymanToskes Pursues Claims Against Salomon Smith Barney on Behalf of Microsoft Employees

Merrill Lynch is not the only brokerage firm that KlaymanToskes is filing claims against for the Microsoft employee stock option losses. In 2003, KlaymanToskes filed claims filed before the New York Stock Exchange and the National Association of Securities Dealers seeking compensatory damages related to the alleged misuse of option financing programs that used affiliated banks of the brokerage firms to exercise employee stock options against Salomon Smith Barney.

The suits allege that the brokerage firms recommended to some Microsoft ESOP participants the use of alternative stock-option financing through the affiliated banks, creating a conflict of interest because they stood to profit from the financing plans.

KlaymanToskes said certain Microsoft employees were advised to use their company stock as collateral to secure loans for home purchases. This allowed the customers’ portfolios to increase borrowing power of the accounts while avoiding margin maintenance levels that would trigger a margin call.

KlaymanToskes’ also alleged that the firm mismanaged their clients’ portfolios because there were option strategies at the time of exercise that would have protected the value of the margined, concentrated portfolio, known as a “zero cost” collar.

KlaymanToskes’ Success in Microsoft Employee Stock Option Claim

In 2005, KlaymanToskes won an award of $237,338 from investment manager UBS/PaineWebber on behalf of one such client, who received “unsuitable investment advice” from the manager relating to Microsoft Employee stock option losses.

The claim alleged that several large U.S. investment managers failed to implement hedging strategies for Microsoft (NASDAQ: MSFT) employees, leaving them over-invested in Microsoft shares, and at risk for more losses than necessary.

The unnamed participant in this case was awarded damages by a National Association of Securities Dealers arbitration panel, the law firm said in a press release.

“As a result of failing to recommend and implement risk management strategies, the (client’s) portfolio was exposed to unnecessary, uncompensated risk,” KlaymanToskes said in an announcement at the time.

About Us

KlaymanToskes is a leading national securities law firm which practices exclusively in the field of securities arbitration on behalf of retail and institutional investors throughout the world in large and complex securities matters. As of February 2021, KlaymanToskes has recovered more than $225 million for investors in FINRA arbitrations. KlaymanToskes has office locations in California, Florida, New York, and Puerto Rico.

Contact

KlaymanToskes

Lawrence L. Klayman, Esq.

(561) 542-5131

lklayman@klaymantoskes.com

www.klaymantoskes.com