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Category Archives: Merrill Lynch

Massachusetts Fines $2.5M for Supervision Violations to Merrill Lynch

William Galvin, Secretary of the Commonwealth of Massachusetts has fined Merrill Lynch $2.5 million for supervisory violations in association with a training presentation in 2013.

The fine order states that the presentation specifically “did not include language regarding client suitability or the fiduciary requirements of Merrill Lynch financial advisers.”

Secretary Galvin, , said “During the presentation, Merrill financial advisers were being trained in how to double their production by, among other things, transferring existing customer assets from commission-based brokerage accounts to fiduciary fee-based alternatives.”

William Halldin, Merrill Lynch spokesman said, “We are reiterating to our employees the need to have internal presentations properly approved before their use, Importantly, as the state notes, this was not a matter involving any conduct that disadvantaged our clients.”

Unsuitable Sales of Floating-Rate Bank Loan Funds Cost Wells Fargo, Banc of America

Wells Fargo and Banc of America were ordered by the Financial Industry Regulatory Authority (FINRA) to pay fines totaling $2.15 million, as well as pay more than $3 million in restitution to customers for losses tied to unsuitable sales of floating-rate bank loan funds.

FINRA ordered Wells Fargo Advisors, LLC, the successor for Wells Fargo Investments, LLC, to pay a $1.25 million fine and to reimburse approximately $2 million in losses to 239 customers. The regulator ordered Merrill Lynch, Pierce, Fenner & Smith Inc., as the successor for Banc of America Investment Services, Inc., to pay a $900,000 fine and reimburse approximately $1.1 million in losses to 214 customers.

Floating-rate bank loan funds are mutual funds that generally invest in a portfolio of secured senior loans made to entities whose credit quality is rated below investment-grade. The funds are subject to significant credit risks and can also be illiquid.

FINRA found that Wells Fargo and Banc of America brokers recommended concentrated purchases of floating-rate bank loan funds to customers whose risk tolerance, investment objectives, and financial conditions were inconsistent with the risks and features of floating-rate loan funds. Specifically, the customers wanted to preserve principal and had conservative risk tolerances, yet brokers made recommendations to purchase floating-rate loan funds without having reasonable grounds to believe that the purchases were suitable for those customers.

FINRA also says that the firms in question failed to train their sales forces regarding the unique risks and characteristics of the funds, as well as failed to reasonably supervise the sales of the products.

“As investors continue to look for yield in a low-interest-rate environment, these actions should serve as a reminder that brokers and their firms need to ensure that investment recommendations are consistent with customers’ investment objectives and risk tolerances,” said Brad Bennett, FINRA’s Vice President and Chief of Enforcement, in announcing the settlement.

“Wells Fargo and Banc of America allowed their brokers to sell floating-rate bank loan funds to investors for whom the positions were unsuitable, resulting in significant losses to many customers,” he added.

As is the case in most FINRA settlements, Wells Fargo and Banc of America neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.


Are Brokers Feeling Pressure to Push Alternative Investments?

The past year has been a good one for big retail brokerages, but many brokers aren’t viewing the increased revenues as a sign to sit back and relax. Instead, some say they’re feeling pressure to keep those revenues up by touting investments with higher commissions and fees. And for investors, that could mean added risks.

As reported Feb. 25 by the Wall Street Journal, more of the larger retail brokerage firms now have an eye on promoting financial products that generate greater profit margins. According to a broker at UBS Wealth Management Americas in New York, there has been a big push to put client money in alternative investments, as well as the lending business.

“Alternative investments are some of the biggest profit generators for the firm,” he said in the WSJ story. Asset-based lines of credit – a relatively easy way to earn a few percent in interest – also are popular.

Part of this newfound encouragement is tied to the way in which UBS pays its brokers. As reported in the Wall Street Journal article, UBS recently fine-tuned its basic formula for paying brokers a percentage of the revenue they produce to include incentives for selling products such as mortgages and credit lines. The changes went into effect in 2013.

Similar formulas, or pay grids as they’re called, are used at Morgan Stanley Wealth Management and Merrill Lynch, which also reward bonuses to brokers with growing loan-based business.

According to the WSJ story, financial advisers at Merrill Lynch also feel the continued push to get more assets into value-based models – i.e. those that charge clients a fee for advice and a financial plan.

In a First, Merrill Lynch Offers a Non-Traded REIT

Non-traded real estate investment trusts (REITs) have traditionally been associated with independent broker/dealers – that is until last month when Merrill Lynch announced that its 17,000-plus registered reps would begin selling the Jones Lang LaSalle Income Property Trust to investors.

The move means Merrill Lynch becomes the first major wirehouse to sell a non-traded REIT. So far, the firm has raised about $50 million from interested clients.

Merrill Lynch’s foray into non-traded REIT territory is based on demand for an “attractive, direct core real estate investment product among mass-affluent investors,” said Keith Glenfield, head of alternative investments for Merrill Lynch, in a Jan. 2 article by Investment News.

“The primary investment objectives are designed to provide attractive current income, preserve and protect invested capital, achieve [net asset value] appreciation over time and enable stockholders to utilize real estate as a long-term portfolio diversifier,” Glenfield said.

Despite Merrill Lynch’s characterization of the Jones Lang Lasalle REIT as a safe source of income, investors may have plenty of reasons to be cautious. Non-traded REITs have been under the radar of state securities regulators for several years now, as have the sales practices of the broker/dealers that sell them.

Issues with non-traded REITs include their complex fee structure, high-risk factors, illiquidity and often inaccurate valuations. Moreover, early redemption of shares is typically extremely limited, and fees connected with their sale can be high and erode total return.

In 2012, the Financial Industry Regulatory Authority (FINRA) reissued an Investor Alert on nontraded REITs following an enforcement action against David Lerner & Associates. One of FINRA’s concerns with Lerner focused on the valuation irregularities that appeared on the monthly statements of investors who owned shares in Lerner’s Apple REITs. Specifically, shares of certain Apple REITs had been listed on the statements as $11 per share even after FINRA instructed broker/dealers in 2009 to adjust prices on the investments more frequently.

For Richer or Poorer: What Happens When Spouses “Steal” From Each Other’s Brokerage Account?

An arbitration panel of the Financial Industry Regulatory Authority (FINRA) recently awarded $2.5 million in compensatory damages to an investor for his claim against Merrill Lynch. The investor was represented by Maddox Hargett & Caruso P.C.

The case itself involved one spouse stealing money from another spouse through a brokerage account. In this instance, the brokerage in question happened to be Merrill Lynch.

The issue, however, is not unusual, and gives a whole new meaning to the marriage vow lines of for “richer and poorer.” Every year, investors lose millions of dollars from stockbroker misconduct, investment firm negligence and securities fraud. In the past year, these kinds of cases have skyrocketed, with more investors filing claims for investment negligence, stockbroker incompetence and IRA theft.

If a spouse “steals” money from his or her spouse’s brokerage account, the brokerage can, in fact, be held liable and cited for investment broker negligence, as well as for other types of misconduct or fraud.

Investment broker negligence occurs when the conduct of broker falls below a standard that’s been established to protect investors against unreasonable risk of harm. The cause of action for stockbroker negligence is based upon duties owed by a broker to his or her clients and the breach of that duty. This includes the duty to exercise due diligence and care in connection with a client’s account.

Ultimately, stockbroker negligence can result in severe financial losses for an investor.

Victims of stockbroker negligence can include anyone: Individual investors, retirees, small businesses, corporations, pension funds, and institutional investors. For a free initial consultation regarding your securities claim, contact Mark Maddox at 800-505-5515. Or, fill out the contact form on this Web site to obtain candid legal advice.

Magnetar Hedge Fund Update

Documents from the Financial Crisis Inquiry Commission (FCIC) shed new light into the hedge fund Magnetar and its role in helping Wall Street create at least $40 billion worth of collateralized debt obligations and then betting against many of those same CDOs to fail.

Magnetar worked with most of Wall Street’s top banks in its deals – deals that ultimately produced millions of dollars worth of extremely toxic, high-risk investments. Among the banks that helped sell those toxic assets to investors: Merrill Lynch, Lehman Brothers, Citigroup, UBS and JPMorgan Chase.

A Jan. 27 story by ProPublica provides in-depth details on the latest findings from the FCIC’s investigation into Magnetar, which has consistently denied any involvement in selecting assets for the CDOs that it invested in and then often bet against.

The most recent report from the FCIC paints a different picture of truth, however. In its final report released on Jan. 27, the FCIC says Magnetar used a CDO called “Norma” to create a $600 million bet against mortgage-related securities. The CDO itself took the other side of the bet. As a result, investors in Norma ultimately lost hundreds of millions of dollars. And the investment bank that underwrote and marketed Norma to investors? Merrill Lynch.

In the FCIC report, Magnetar apparently made the selections without the knowledge of the CDO’s manager, NIR Capital Management. NIR was paid to manage the deal and was supposed to be independent of the investment bank and act in the interests of the CDO as a whole, according to ProPublica.

“When one Merrill employee learned that Magnetar had executed approximately $600 million in trades for Norma without NIR’s apparent involvement or knowledge, she e-mailed colleagues, ‘Dumb question. Is Magnetar allowed to trade for NIR?’”

The Merrill employee was one of the risk managers in charge of policing the firm’s CDO business.

“NIR abdicated its asset selection duties to Magnetar with Merrill’s knowledge,” the FCIC report states.

The e-mails regarding Magnetar’s asset selections for Norma came to light in a lawsuit between Netherlands-based Rabobank and Merrill Lynch. Once the e-mails and other documents were brought forth during discovery, Merrill Lynch settled the lawsuit for an undisclosed amount.

In the FCIC report, it was revealed that Magnetar received $4.5 million as part of the CDO’s “expenses.” Merrill Lynch, however, failed to disclose that fact to other investors, according to the FCIC. Magnetar’s own legal team explained the $4.5 million as “a rebate” on purchases made by the hedge fund.

Merrill Lynch Settles SEC Fraud Charges

On Jan. 25, the Securities and Exchange Commission (SEC) charged Merrill Lynch with civil securities fraud for “misusing customer order information” to place proprietary trades and for charging customers undisclosed trading fees.

Without admitting or denying the charges, Merrill has agreed to pay a $10 million fine and consent to a cease-and-desist order.

According to the SEC, the infractions occurred between 2003 and 2005 on Merrill Lynch’s proprietary equity strategy desk, which traded for the firm’s benefit and had nothing to do with executing customer orders. Merrill’s trading desk was located on its main equity trading floor in New York, where market makers received and executed customer orders.

The SEC says Merrill’s equity strategy traders had access to institutional customer orders and used that access to place trades on Merrill’s behalf after the customer trades were made. The SEC went on to say that this misuse of information was contrary to claims by Merrill Lynch to customers that orders would be maintained on a strict need-to-know basis.

“Investors have the right to expect that their brokers won’t misuse their order information,” said Scott W. Friestad, Associate Director in the SEC’s Division of Enforcement. “The conduct here was clearly inappropriate. Merrill’s proprietary traders had improper access to information about the firm’s customer orders, and misused it to place trades on the firm’s behalf.”

The SEC’s order also found that between 2002 and 2007 Merrill had agreements with certain institutional and high net-worth customers that Merrill would only charge a commission equivalent for executing riskless principal trades. However, in some instances, Merrill also charged customers undisclosed mark-ups and mark-downs by filling customer orders at prices less favorable to the customer than the prices at which Merrill purchased or sold the securities in the market.

Bank of America acquired Merrill Lynch in 2009 in a $20 billion deal forged with the help of government bailout dollars during the height of the financial crisis in 2008.

Merrill Lynch & The ‘Sophisticated Investor’ Defense

A June 11 blog by the Wall Street Journal illustrates a growing trend on Wall Street – the sophisticated investor defense. The premise is simple: If the complex financial products that Wall Street markets and sells go south, it’s the investor’s problem. After all, the products are geared to those who are financially savvy. They should have therefore known the risks involved.

In reality, even the most sophisticated investor may be unaware of the complexities and risks surrounding some of today’s investments. Moreover, even the “average” investor gets burned in these deals, usually through pension funds that participate in the investments.

A recent case involving Merrill Lynch and collateralized debt obligations (CDOs) is a perfect example. Merrill Lynch’s CDO deals were sold to institutional and retail investors. In other words, so-called sophisticated and less-than-sophisticated investors were part of the sales pitch. It also apparently was common fare for Merrill Lynch to sell retail investors the lowest-rated CDO slices of the deals.

Investors like the Slomacks ultimately paid the price, according to the WSJ article. The Slomacks invested $2.65 million in several Merrill-issued CDOs, losing all but $16,500. They have since filed an arbitration claim against Merrill Lynch with the Financial Industry Regulatory Authority (FINRA).

Another investment firm looking to employ the “sophisticated investor” defense over CDO deals gone bad is Goldman Sachs. For more than a year, Goldman has faced intense questioning by the U.S. Senate Permanent Subcommittee on Investigations about its CDO dealings, while investors contend Goldman used deceptive sales practices to market billions of dollars’ worth of the products. To date, the probes have cost Goldman $25 billion in market capitalization, according to a June 14 article by Reuters.

In April, the Securities and Exchange Commission (SEC) filed a civil fraud lawsuit against Goldman Sachs over a CDO called Abacus 2007. The Abacus transactions were synthetic collateralized debt obligations – financial products that many financial analysts say were largely responsible for the worst collapse in financial markets since the Great Depression.

Merrill Lynch CDO Deals Under Fire

Merrill Lynch’s sales of risky collateralized debt obligations (CDOs) have come back to haunt Main Street, with many investors alleging they didn’t thoroughly understand the dangers that the complicated products present.

“We were just lambs being led to the slaughter,” said investor Michael Slomak in a June 11 story in the Wall Street Journal.

Slomack is part of a Cleveland family whom he says invested $2.65 million in several Merrill-issued CDOs. According to the WSJ article, the structured securities had a level of risk that was never adequately explained to Slomack and other family members. The family lost all but $16,500 and has since filed arbitration claim against Merrill Lynch with the Financial Industry Regulatory Authority (FINRA),

Merrill Lynch, which is now part of Bank of America, may be especially susceptible to the wrath of investors because it has sold the biggest inventory of CDOs and had the industry’s biggest brokerage force to sell them in the years leading up to the financial crisis. As the Wall Street Journal article points out, it was common practice for Merrill to pitch retail clients the lowest-rated CDO slices while it sold the higher-rated tranches to larger institutions.

At issue in the Merrill case – and in other cases and arbitration claims related to CDO deals – is the idea of investor sophistication. Even though there are certain regulatory rules in place regarding the types of investors who can purchase higher-risk financial products like CDOs, newer investment products have become more complex in recent years. As a result, the complexities and risk levels of these products may not be fully understood by even the most sophisticated retail customer.

Boston businessman Russell Stephens knows this only too well. Stephens, who considers himself a “sophisticated” investor, bought a $400,000 CDO from a Merrill Lynch adviser in Virginia. Stephens, 56, said he was sold the tranche most vulnerable to losses in the event of default, yet was told that the CDO would be an appropriate replacement for a municipal bond. As fate would have it, the CDO hit a wall, and Stephens faced an unexpected tax charge. Ultimately, the value of his investment plummeted to $80,000.

“It’ been a nightmare,” Stephens said in the Wall Street Journal, adding that the deal “wasn’t fully explained” to him.

Lack of disclosure also was a problem for investor Alan Lipson. Lipson lost $20,000 in a Merrill Lynch CDO. He attributes the loss to the fact that he missed a key section of the prospectus, which cited information on how banks that provide the CDO assets could stop paying interest at any time.

For Ralph Cortell, a former Ohio hair salon business owner, the issue regarding his CDO losses was alleged misrepresentation. Cortell, who died in 2008, invested $2.65 million as a nest egg for his four daughters. In late 2004, Cortell and his son-in-law sought the advice of two local Merrill brokers on how they should invest proceeds from the sale of 200 hair salons.

The brokers allegedly assured them that CDOs were “very safe with little or no risk.” Later, a former Merrill Lynch vice president told Cortell to put even more money into CDOs, stating that they had “zero risk.”

A complaint with FINRA is now pending in Cortell’s case.

Ex-Bank of America CEO, Ken Lewis Faces Fraud Charges Over Merrill Lynch Deal

Bank of America execs, including former CEO Ken Lewis, are gearing up for a heated legal battle with New York Attorney General Andrew Cuomo. On Feb. 4, Cuomo charged Lewis of defrauding investors and the U.S. government when he helped put the wheels into motion for Bank of America to buy financially troubled Merrill Lynch & Co.

Specifically, Cuomo alleges that Lewis, as well as BofA’s former chief financial officer Joe Price, failed to tell shareholders about the $16 billion in losses that Merrill had incurred before it was bought by Bank of America. After shareholders approved the acquisition, Cuomo says Lewis then demanded government bailout funds to keep the deal afloat.

In total, the government injected $45 billion into Bank of America via the purchase of preferred shares, including $20 billion approved after the merger in January 2009.

“We believe the bank management understated the Merrill Lynch losses to shareholders, then they overstated their ability to terminate their agreement to secure $20 billion of TARP money, and that is just a fraud,” Cuomo said today at a press conference. “Bank of America and its officials defrauded the government and the taxpayers at a very difficult time.”

Separately, the Securities and Exchange Commission (SEC) announced that it had reached an agreement with Bank of America over the company’s decision to pay $3.6 billion of bonuses to former Merrill employees for fiscal year 2008. BofA agreed to pay a $150 million fine to settle the matter.

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