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Zamansky LLC Investigates Losses from Call Writing Strategies Suffered at Morgan Stanley and Merrill Lynch Due to Investment Fraud

January 25, 2023 Investigations

On December 1, 2022, a Financial Industry Regulatory Authority (FINRA lawsuit) arbitration panel awarded a customer of Morgan Stanley $11.5 million in damages for losses suffered in a call writing option strategy.  The arbitration panel also awarded the investor $157,656 in costs and other associated fees.  The losses were suffered in a covered call writing options strategy run by financial advisor Craig Sherman Thislethwaite of Morgan Stanley’s Fox Thisletwaite Group in Perrysburg, Ohio.

In his FINRA lawsuit, the Morgan Stanley customer alleged that he suffered “lost opportunity damages” when his stocks, including  Nvidia, Apple, Salesforce, Microsoft, Tesla and others, were “called away” from his account, and he was forced to repurchase them at a loss.   He also alleged that unauthorized sales were made in his account.  He asserted legal claims for unauthorized trading, breach of fiduciary duty, breach of contract, investment fraud, negligence and failure to supervise.

Other customers with losses from call writing strategies may have potential legal claims.  

Morgan Stanley offers the Meridian Income Enhancer Strategy which is a covered call options writing strategy managed by the Meridian Wealth Management Group in Atlanta, Georgia that focuses on concentrated stock positions.  On June 14, 2022, a FINRA arbitration panel issued an award to a customer of damages of $185,238 for her Morgan Stanley financial advisors’ unsuitable recommendation of the Meridian Income Enhancer strategy.

Morgan Stanley financial advisor Anthony Michael Gallea in Hendersonville, North Carolina manages $1.4 billion in covered call writing strategy according to his website. Mr. Gallea conducts business as part of the Pelican Bay Wealth Management Group.  According to his FINRA BrokerCheck report, Mr. Gallea has been the subject of three customer complaints from investors in his call writing strategy.

Merrill Lynch financial advisors, Michael Turner and Jeremy Newton, at the Houston, Texas branch office of Merrill Lynch as the TSPN Wealth Management Group, were the subject of a customer complaint due to a call options trading strategy, according to FINRA Broker-Check.

Call Options Writing Strategies Carry Hidden Risk

Financial advisors attract investors into call options writing strategies with claims that selling call options on stocks is generally a “low risk” way to increase returns by producing premium income.  If an investor desires to hold the stock anyway, the premium income appears to be a safe way to enhance or increase returns on a stock.  However, there are several ways that this strategy can be executed in a speculative or high-risk way that will result in steep losses for an investor.

If the stock market rises rapidly after call options are sold, an investor can suffer a large loss on the call option.   To avoid a sale of the stock which covers the call option, an investor may be forced to repurchase the call option at a steep loss.  If the investor does not repurchase the sold call option, then the stock may be called away or sold out from the investor which can cause an unwanted tax liability.  If the investor wanted to hold that stock long-term, then he or she will have to repurchase the stock at a much higher price, causing an unforeseen loss.

When a covered call writing strategy is used on a portfolio of stocks, it can be very difficult for an investor to understand the risk level.  The dynamic movement of stock and option prices can prevent an investor from avoiding losses before it is too late.  

What Can Investors Do?

If you have investment losses from a call writing strategy and wish a review of whether you may have a legal claim to recover your losses due to investment fraud, please call investment fraud attorney Jake Zamansky at (212) 742-1414 or email jake@zamansky.com for a free evaluation of your potential legal rights.

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