Merrill to pay more than $15 million to settle charges

What happens when you don’t exercise proper oversight, or you fail to sufficiently supervise your professionals’ activities?

Bad things. Bad expensive things.

Just this week, the Securities and Exchange Commission (SEC) announced that Merrill Lynch, Pierce, Fenner & Smith Inc. (Merrill) will pay more than $15 million to settle charges that its employees misled customers into overpaying for Residential Mortgage Backed Securities (RMBS). In full, the firm will repay more than $10.5 million to defrauded customers and approximately $5.2 million in penalties.

Trader profit at what cost?

In its order, the SEC found that Merrill Lynch traders and salespersons convinced the bank’s customers to overpay for RMBS by deceiving them about the price Merrill Lynch paid to acquire the securities.  The order also found that Merrill Lynch’s RMBS traders and salespersons illegally profited from excessive, undisclosed commissions – called “mark-ups” – which in some cases were more than twice the amount the customers should have paid.

Where was compliance?

Compliance was watching…sort of.

According to the SEC filing, Merrill did have policies that prohibited false or misleading statements. The broker-dealer also had the means to monitor communications for such statements, and it also had policies that prohibited the kind of excessive markups on transactions in non-agency residential mortgage-backed securities (non-agency RMBS).

What was lacking was a mechanism for the reasonable monitoring for the types of false or misleading statements responsible for this embarrassingly costly hand slap. Moreover, the SEC found that the firm’s existing policies and procedures to monitor excessive markups were not reasonably designed and implemented. Bottom line:  Merrill Lynch failed to have compliance and surveillance procedures in place that were reasonably designed to prevent and detect the misconduct that increased the firm’s profits on RMBS transactions to the detriment of its customers.

Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit derides lying to customers in opaque RMBS markets as the Merrill representatives did. “The Commission found,” he said, “that Merrill Lynch failed in its obligation to supervise traders who allegedly used their access to market information to take advantage of the bank’s own customers.”

The SEC’s order determined that that the Merrill Lynch traders and salespersons violated antifraud provisions of the federal securities laws in purchasing and selling RMBS and that Merrill Lynch failed to reasonably supervise them. Without admitting or denying the findings, Merrill Lynch agreed to be censured, pay a penalty of approximately $5.2 million, and pay disgorgement and interest of more than $10.5 million to Merrill Lynch customers that were parties to the transactions that are the subject of the order.

Was Merrill’s faulty compliance execution worth $15 million?

Of course not. Why not put in solid compliances processes and procedures and use the money NOT spent on fines and penalties for something else? That’s where Patrina can help. We’ve built a business on helping organizations stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective and comprehensive, 8-module compliance solution, and compliant email/text archiving, data capture, file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered.