By Kiana Wilburg
Before Guyana could even pass a law to establish its Natural Resource Fund (NRF), one major corporation, Merrill Lynch, has already expressed its interest to the government, to potentially help manage the nation’s oil wealth.
But this very company that is courting local officials has been at the heart of several bribery investigations and has been fined billions of dollars for fraud, misusing customer’s cash and exposing its clients to great financial risk.
MISUSING CUSTOMER CASH
In June 2016, the Securities and Exchange Commission (SEC) announced that Merrill Lynch agreed to pay US$415 million and admit wrongdoing to settle charges that it misused customer cash to generate profits for the firm and failed to safeguard customer securities from the claims of its creditors.
In fact, an investigation found that Merrill Lynch violated the SEC’s Customer Protection Rule by misusing customer cash that rightfully should have been deposited in a reserve account. The probe revealed that Merrill Lynch engaged in complex trades that lacked economic substance and artificially reduced the required deposit of customer cash in the reserve account.
The maneuver freed up billions of dollars per week from 2009 to 2012 that Merrill Lynch used to finance its own trading activities. Had Merrill Lynch failed in the midst of these trades, the firm’s customers would have been exposed to a massive shortfall in the reserve account.
Merrill Lynch further violated the Customer Protection Rule by failing to adhere to requirements that fully-paid for customer securities be held in lien-free accounts and shielded from claims by third parties should a firm collapse. Had Merrill Lynch collapsed at any point, customers would have been exposed to significant risk and uncertainty of getting back their own securities.
“The rules concerning the safety of customer cash and securities are fundamental protections for investors and impose lines that simply can never be crossed,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.
“Merrill Lynch violated these rules, including during the heart of the financial crisis, and the significant relief imposed reflects the severity of its failures.” (https://www.sec.gov/news/pressrelease/2016-128.html)
FINED US$42 MILLION FOR FRAUD
Last March, Merrill Lynch and its parent company, Bank of America, agreed to pay a record US$42 million fine to the State of New York for fraudulent activity related to its electronic trading services.
New York Attorney General Eric Schneiderman announced that an investigation of the Bank’s electronic trading services revealed a fraudulent “masking” scheme, designed to mislead clients about the entity responsible for executing in-house orders, the state said.
Though the Bank told its customers it was executing trade orders themselves, they were in reality routing them to electronic liquidity providers, including Citadel, Two Sigma and Knight. The bank used masking codes to make the trades.
“Bank of America-Merrill Lynch went to astonishing lengths to defraud its own institutional clients about who was seeing and filling their orders, who was trading in its dark pool, and the capabilities of its electronic trading services,” Schneiderman said in a statement.
The investigation showed that Bank of America and Lynch began the masking scheme as early as 2008 and that at least 16 million client orders were affected.
In addition to masking efforts, including the production of false transaction reports, investigators with the attorney general’s office in New York uncovered “other inaccurate representations to investors about the Bank’s electronic trading services” — all part of a broader effort to make the bank’s “electronic trading services look more sophisticated and safer than they really were.”
Officials with Bank of America-Merrill Lynch claim they began to address transparency problems related to their electronic trading services several years ago.
“The settlement primarily relates to conduct that occurred as long as 10 years ago,” the Bank told CNBC in an email. “At all times we met our obligation to deliver the best prices to clients. About five years ago, we addressed the issues concerning communicating to clients about where their trades were executed.” (https://www.upi.com/Bank-of-America-Merrill-Lynch-agrees-to-pay-NY-42-million-fine-for-fraud/7851521905381/)
SEC INVESTIGATES SWF DEALS
The Securities and Exchange Commission in 2011also launched an investigation to examine whether American financial firms violated the Foreign Corrupt Practices Act in their efforts to secure investments from foreign governments’ investment funds.
The agency sent letters to several firms asking them to preserve documents, though it is only in the early stages of its inquiry.
At the heart of the inquiry were the huge investments made by sovereign wealth funds in American financial firms in recent years. Citigroup, Morgan Stanley and Merrill Lynch all sought capital injections from these government investment funds, raising billions of dollars in capital to shore up their balance sheets. (https://dealbook.nytimes.com/2011/01/13/s-e-c-looking-into-deals-with-sovereign-funds/)
ANOTHER FRAUD CASE
Last June, the Securities and Exchange Commission announced that it will be fining Merrill Lynch, US$5.2 million. The fine stems from deals involving residential mortgage-backed securities (RMBS) and the broker-deal will also have to pay back $10.5 million to customers.
Over the course of its investigation, the SEC found that Merrill Lynch had lied to its customers regarding the pricing of RMBS. Traders and salespeople working for the firm were able to convince customers to overpay for the securities by lying about how much they had paid for them.
On top of this, the same traders and salespeople massively overcharged for commissions. The SEC noted that, in some cases, they received double what they should have.
Merrill Lynch will be charged as these traders and salespeople violated antifraud securities laws. The SEC found that the company did not fulfill its supervisory duties and was therefore unable to prevent the lawbreaking from occurring.
The company did not admit or deny any of the investigation’s findings. Instead, it agreed to pay a $5.2 million fine to the SEC and pay back $10.5 million to the customers involved in the fraudulent transactions. (https://www.financemagnates.com/institutional-forex/regulation/merrill-lynch-pay-back-10-million-securities-fraud/)
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