>>
View
the Consent Order with Merrill Lynch
(32K PDF) free
plug-in
TRENTON
– Attorney General Peter C. Harvey
today announced that Merrill Lynch Pierce
Fenner & Smith Inc. will pay New Jersey
$10 million and implement significant
reforms throughout the firm to resolve
allegations that it failed to reasonably
supervise certain financial advisers in
New Jersey who market timed mutual funds
in violation of the firm’s policies.
The
agreement reached by the Attorney General
settles allegations by the New Jersey
Bureau of Securities concerning trading
by a hedge fund, Millennium Partners,
L.P. The allegations focus on market timing
conduct by three financial advisers who
joined Merrill Lynch’s Fort Lee
branch office in January 2002. Millennium
was a prior client of the three Merrill
Lynch employees, and they continued market
timing for Millennium at Merrill Lynch,
seeking to profit from market fluctuations
by trading in and out of mutual funds
using accounts at Merrill Lynch as well
as outside accounts. Over a third of the
trades involved mutual funds held as sub-accounts
of variable annuity contracts purchased
for Millennium.
Despite
warnings from supervisors that they were
violating Merrill Lynch’s policies,
the financial advisers continued to market
time for Millennium until they were fired
in October 2003, using multiple accounts,
undisclosed agreements and other ploys
to conduct and disguise their trading.
They did not keep records of trades placed
through non-Merrill Lynch variable annuity
contracts or placed directly in mutual
fund accounts held outside of Merrill
Lynch.
“Merrill
Lynch failed to reasonably supervise these
financial advisers, whose market timing
siphoned short-term profits out of mutual
funds and harmed long-term investors,”
said Attorney General Harvey. “To
resolve these securities issues, Merrill
Lynch has agreed to implement reforms
to enhance supervision of its financial
advisers, particularly in the area of
annuities, where trading in annuity sub-accounts
has been done under the radar, without
records. This is an industry-wide issue,
and the record-keeping and supervision
requirements in this agreement should
set a new standard.”
New
Jersey worked cooperatively in this matter
with the New York Stock Exchange, which
is announcing a separate settlement with
Merrill Lynch today.
The
three financial advisors, and a fourth
who was involved to a lesser degree, placed
12,457 trades for Millennium in at least
521 mutual funds and 63 mutual fund sub-accounts
of at least 40 variable annuities. Millennium
made profits in over half of the funds
and fund sub-accounts. In those funds
where Millennium made profits, its gains
totaled about $60 million.
“This
case illustrates the critical role the
states play in regulating securities and
the investment industry,” said Franklin
L. Widmann, Chief of the Bureau of Securities.
“Our investigation of these rogue
financial advisers based in New Jersey
led to an agreement with Merrill Lynch
that will protect investors by enhancing
supervision of financial advisers throughout
the firm.”
Reforms
That Set New Industry Standard for Compliance
Under
the agreement reached cooperatively with
Merrill Lynch, the firm will pay New Jersey
a $10 million civil penalty. In addition,
the firm and its affiliate Merrill Lynch
Insurance Group Inc. will implement new
procedures to maintain, as a required
“book and record” under New
Jersey and federal securities laws, records
of all client reallocation requests made
through a Merrill Lynch employee that
involve mutual funds held as sub-accounts
of variable annuity products of outside
insurance carriers. Neither firm recorded
those requests in the past. By properly
treating such transactions as subject
to the requirement that financial advisers
record every request by a client for a
trade of a security, Merrill Lynch will
subject such transactions to oversight
under its policies requiring supervisors
to review such records to monitor trading.
More
generally, Merrill Lynch will implement
and enforce a new policy and procedure
addressing how financial advisers should
deal with instructions from clients to
trade mutual funds in accounts held outside
of Merrill Lynch. All such transactions
are subject to New Jersey and federal
books and records requirements. Merrill
Lynch also will issue a global compliance
alert to all of its financial advisers,
supervisors and compliance personnel reinforcing
its policies and procedures mandating
retention and review of correspondence
with clients. The firm has agreed to fully
cooperate with the State in any investigation
or litigation related to this matter.
Deputy
Attorney General Anna Lascurain, Chief
of the Securities Fraud Prosecution Section
of the Division of Law, handled the case
for the Attorney General. It was investigated
by Chief of Enforcement Richard Barry,
Regulatory Attorney Ethan Silver and Investigators
Julian Leone and James Monagle of the
Bureau of Securities.
>>
View
the Consent Order with Merrill Lynch
(32K PDF) free
plug-in
Market
Timing Activity
Although
the three financial advisers involved
in the allegations were told by supervisors
in February 2002 that Millennium’s
short-term trading of mutual funds violated
Merrill Lynch’s internal policy
prohibiting market timing, the financial
advisers continued such trading for Millennium
and inadequate action was taken by Merrill
Lynch to enforce its policy.
The
financial advisers were warned again in
May 2002 and subsequently were told by
supervisors that any short-term trading
of mutual fund positions by Millennium
could not be done through Merrill Lynch.
The financial advisers were instructed
that Millennium could only make such trades
directly in accounts maintained by Millennium
at the mutual fund companies.
Despite the warnings, the Merrill Lynch
financial advisers continued to engage
in market timing for Millennium in mutual
fund accounts outside of Merrill Lynch.
The financial advisors also placed short-term
trades for Millennium in mutual funds
held as sub-accounts of non-Merrill Lynch
variable annuity and corporate-owned life
insurance contracts purchased for Millennium
in the names of employees. Under such
contracts, the investor may choose various
investment options. No records were kept
of those transactions.
After
Merrill Lynch fired the three financial
advisers in October 2003, it fined three
supervisors in connection with the Millennium
market timing.
The
Bureau of Securities alleged that Merrill
Lynch failed to reasonably supervise its
financial advisers in that it failed to:
- adequately
react to red flags and enforce its policy
prohibiting market timing;
-
detect and stop activity of the financial
advisers in connection with accounts
maintained by the client directly at
the mutual funds – and adequately
establish and enforce policies and procedures
regarding record keeping, trading and
supervision of this activity;
- adequately
enforce policies regarding the review
and retention of communications between
clients and financial advisers relating
to its business;
- timely
discipline the financial advisers at
times when they were discovered to be
in apparent breach of Merrill Lynch’s
policies.
Continued
Securities Fraud Enforcement
Attorney
General Harvey has increased the staff
and resources of the Bureau of Securities,
which played a major role in the landmark
settlement in April 2003 between regulators
and ten top Wall Street firms regarding
stock analyst practices. New Jersey was
co-chair of the steering committee for
the multi-state task force that investigated
the firms. New Jersey also led the investigation
of Bear, Stearns & Co. The case brought
industry reforms to ensure that stock
analysts are not pressured to report favorably
on stocks and bonds of investment banking
clients of their firm.
On
June 1, 2004, Attorney General Harvey
reached an $18 million settlement with
Allianz Dresdner Asset Management and
two affiliated companies regarding allegations
that they permitted a large investor to
market time more than $4 billion in transactions
in their mutual funds in violation of
fund policies and to the detriment of
long-term investors. The settlement involved
the largest penalty ever collected by
New Jersey in a securities case and required
defendants to implement reforms to ensure
that portfolio managers function independently
of business managers and funds comply
with their internal policies barring market
timing.
Between
those milestones, New Jersey filed eight
major securities fraud cases involving
over 1,000 investors and more than $160
million in investments. On June 2, 2004,
Attorney General Harvey accepted an invitation
to testify before the U.S. Senate Committee
on Banking, Housing and Urban Affairs
on the vital role of the states in regulating
securities and protecting investors.
>>
View
the Consent Order with Merrill Lynch
(32K PDF) free
plug-in
# # #
_ag-ph_update.gif)
