An arbitration panel has ordered Merrill Lynch to pay an investor $1.4 million in a case that called into question the value of the collateralized loan obligation investments the firm sold.

Bobby L. Hayes, a 68-year-old Incline Village, Nev., resident and retired chemical engineer, invested $883,000 in series E tranche investments in collateralized loan obligations that had already lost its value when he bought them in August 2007, his lawyer Thomas Bradley, who is based in Reno, Nev., said.

Bank of America-owned Merrill Lynch disputes that claim that the securities were worthless when Hayes bought them, according to firm spokesman Bill Halldin.

In a decision handed down in January, a Financial Industry Regulatory Authority panel sided with Hayes on the case, one year after he initially filed his claim. The $1.4 million award includes $1.13 million in rescissionary damages, including the $883,000 investment plus almost $252,000 in rescissionary interest.

Merrill Lynch was also ordered to pay $218,344 in attorneys’ fees, $23,500 in costs to Hayes, and $375 for the initial claim filing cost.

The collateralized loan obligation investments were investments sold in tranches, according to Bradley, after Bank of America bought a set of commercial loans in 2007 from Lyon Capital Management. The E tranche carried the most risk and absorbed the most losses, while the D, C and B tranches above it carried their own risk and loss profiles and were sold to financial firms.

The problem came in July 2007, Bradley said, when the collateralized loan obligation market suffered an unprecedented loss. When Hayes purchased the investment the next month, the value to the series E investments had already been affected, he said.

“All the investment had to lose was one half of one percent before he was underwater,” Bradley said. “But it had lost 5%, so he was significantly underwater and his investment was worthless.”

The FINRA arbitration case ultimately came down to the perceived value of those investments. “Mr. Hayes and I are very proud of the arbitration panel for reaching the decision that it made,” Bradley said.

Merrill Lynch spokesman Halldin said that the securities were not worthless when they were purchased in 2007. “We disagree with the panel's decision given the facts of this case,” Halldin said. “Following the purchase of this investment, the market experienced extreme volatility.”

Lorie Konish writes for On Wall Street.