Tags: BofAs Merrill Settles SEC Fraud Case for 10 Million

BofA's Merrill Settles SEC Fraud Case for $10 Million

Tuesday, 25 Jan 2011 03:04 PM

Bank of America Corp.'s Merrill Lynch unit agreed to pay $10 million to settle U.S. Securities and Exchange Commission charges that it fraudulently misused customer orders so it could trade for its own benefit.

The settlement stemmed from SEC charges that Merrill used the order information to place proprietary trades on a desk it no longer operates. The SEC also accused Merrill of charging hidden trading fees to institutional and wealthy customers.

Merrill did not admit wrongdoing in agreeing to settle.

"It's a slap on the wrist," said David Robbins, a partner at the law firm Kaufmann, Gildin, Robbins & Oppenheim LLP in New York and a former compliance chief at the American Stock Exchange. "This penalty is like a traffic ticket. If the desk had still been around, you can be sure the sanction would have been to close it down."

According to the SEC, from February 2003 to February 2005 Merrill operated a proprietary trading desk on its equity trading floor in New York known as the Equity Strategy Desk.

It said that while Merrill told customers their orders would generally be kept private, traders on the Equity Strategy Desk would learn information about orders from institutional clients and use it to place trades with Merrill's own money.

"Investors have the right to expect that their brokers won't misuse their order information," Scott Friestad, associate director in the SEC enforcement unit, said in a statement. "The conduct here was clearly inappropriate."

The SEC also found that from 2002 to 2007, Merrill charged undisclosed fees to some institutional and high-net-worth customers when filling orders for "riskless principal trades."

Such trades occur when a broker-dealer receives a customer order, conducts a contemporaneous offsetting trade, and then "allocates" the securities to the customer, the SEC said.

Bill Halldin, a Bank of America spokesman, said in a statement that Merrill has adopted "a number of policy changes" to separate proprietary trading from other trading, and has improved training and supervision related to principal trades.

The SEC said the $10 million penalty took into account remedies taken by Merrill after Charlotte, North Carolina-based Bank of America acquired the company at the beginning of 2009. Bank of America is the largest U.S. bank by assets.

"The fact Merrill didn't self-regulate is the bigger problem," Robbins said. "I hope other firms will see this as a signal to stop trading on confidential customer information."

© 2015 Thomson/Reuters. All rights reserved.

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