Corporate & Securities Law

Merrill Lynch Settles SEC Fraud Charges

By Keith Griffin

On Jan. 25, the Securities and Exchange Commission (SEC) charged Merrill Lynch with civil securities fraud for ?misusing customer order information? to place proprietary trades and for charging customers undisclosed trading fees.

Without admitting or denying the charges, Merrill has agreed to pay a $10 million fine and consent to a cease-and-desist order.

According to the SEC, the infractions occurred between 2003 and 2005 on Merrill Lynch?s proprietary equity strategy desk, which traded for the firm?s benefit and had nothing to do with executing customer orders. Merrill?s trading desk was located on its main equity trading floor in New York, where market makers received and executed customer orders.

The SEC says Merrill?s equity strategy traders had access to institutional customer orders and used that access to place trades on Merrill?s behalf after the customer trades were made. The SEC went on to say that this misuse of information was contrary to claims by Merrill Lynch to customers that orders would be maintained on a strict need-to-know basis.

?Investors have the right to expect that their brokers won’t misuse their order information,? said Scott W. Friestad, Associate Director in the SEC’s Division of Enforcement. ?The conduct here was clearly inappropriate. Merrill?s proprietary traders had improper access to information about the firm?s customer orders, and misused it to place trades on the firm’s behalf.?

The SEC?s order also found that between 2002 and 2007 Merrill had agreements with certain institutional and high net-worth customers that Merrill would only charge a commission equivalent for executing riskless principal trades. However, in some instances, Merrill also charged customers undisclosed mark-ups and mark-downs by filling customer orders at prices less favorable to the customer than the prices at which Merrill purchased or sold the securities in the market.

Bank of America acquired Merrill Lynch in 2009 in a $20 billion deal forged with the help of government bailout dollars during the height of the financial crisis in 2008.

Full post as published by Representing Investors on January 26, 2011 (boomark / email).