Merrill Lynch agreed to pay $415 million and admit wrongdoing after an SEC investigation found the firm misused customer cash to generate profits, and collaterally put customer securities at risk by failing to safeguard the securities from creditor claims. The settlement includes a $358 million penalty and $57 million in disgorgment.
The SEC action runs parallel to FINRA's decision to fine Merrill Lynch $5 million for what it deems were "negligent disclosure failures" related to the firm's sales of five-year senior debt notes and a failure to adequately disclose certain costs so as to make it appear that fixed costs associated with strategic return notes were lower than they actually were. FINRA specifically accused the firm of misleading customers by failing to mention at least one expense category entirely in its marketing materials.
The SEC investigation states Merrill Lynch engaged in complex option trades that "lacked economic substance," effectively freeing up billions of dollars per week that the firm used to finance its own trades. The SEC notes that if Merrill Lynch had failed in the midst of these trades, customers would have been exposed to a "massive shortfall" in the firm's reserve account, since the firm had artificially reduced the required deposit of customer cash in its reserve account.
The order notes that Merrill Lynch held up to $58 billion per day in customer securities in a clearing account that was subject to a general lien, and held additional securities in accounts similarly subject to liens. The SEC again noted that had Merrill Lynch collapsed while engaging in this activity, customers would have faced exposure to significant risk and uncertainty of getting back their own securities.
Finally, the SEC filed charges against former Merrill Lynch Head of Regulatory Reporting William Tirrell for failing in his responsibility to monitor trades and ensure the firm was allocating a reasonable amount of money to its reserve account.
FINRA's investigation, meanwhile, concerned Merrill Lynch's alleged failure to disclose the S&P 500 Index's "execution factor" to customers, noting that the firm instead emphasized a two-percent sales commission and 0.75% annual fee, effectively giving the appearance that the note investments had fairly low fixed costs.
By not adequately disclosing the execution factor, which is an Index feature designed to estimate and replicate transaction costs in simulated sales/purchases, FINRA says that the firm materially misled customers, noting that, "a reasonable retail customer would have considered it important that the execution factor imposed these costs."
If you have invested with Merrill Lynch or with any broker, financial adviser or firm whose misuse of customer funds, safeguard deficiencies and adverse risk exposure, or failure to adequately disclose costs and fees or similar material facts has proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.