An Illinois couple who accused Salomon Smith Barney of giving them inept tax advice on stock option exercises has won $230,000 in arbitration.
The couple, Daniel R. and Vicki Taylor, claimed that their broker was unaware of the tax consequences of exercising options on Cisco Systems Inc. stock, and never suggested hedging against it.
The stock was worth about $1.7 million in June 2000 when they exercised the options Daniel Taylor had received while working at Cisco; when the value of Cisco began to plummet in 2001, the Taylors were forced to sell all the shares and deposit $100,000 in cash to meet margin calls.
They were also hit with an unanticipated tax bill that surprised even their broker, they claim. Although their broker had recommended diversifying out of the Cisco stock, the Taylors said they were concerned that they would incur a short-term capital gain if they sold the shares.
They claim their broker never mentioned that they were already on the hook for significant taxes as soon as they exercised the options, information that would have led them to make different decisions involving the account.
The couple didn’t name their broker in the claim.
Salomon Smith Barney didn’t immediately return calls seeking comment on the case.
The Taylors’ claim followed a flood of similar complaints about option strategies promoted by Salomon Smith Barney and other companies. A group of WorldCom Inc. employees is seeking more than $30 million in damages against Salomon Smith Barney for its stock option advice in 1999 and 2000, claiming that brokers advised the group to exercise and hold the shares, then borrow from Salomon to pay the costs of the transactions and the taxes that were generated.
In March, arbitrators awarded $3 million to a married couple who claimed that a Merrill Lynch & Co. broker gave negligent advice to them regarding option strategies, concentration and the consequences of a large stock option exercise.