SEC Charges Merrill Lynch, Four Merrill Lynch Executives with Aiding
and Abetting Enron Accounting Fraud
FOR IMMEDIATE RELEASE
Merrill Lynch Simultaneously Settles Charges for Permanent Anti-Fraud Injunction and Payment of $80 Million in Disgorgement, Penalties and Interest
Washington, D.C., March 17, 2003 -- The Securities and Exchange Commission today charged Merrill Lynch & Co. Inc. and four of its former senior executives with aiding and abetting Enron Corp.'s securities fraud. The Commission's complaint, filed in U.S. District Court in Houston, alleges that Merrill Lynch and its former executives aided and abetted Enron Corp.'s earnings manipulation by engaging in two fraudulent year-end transactions in 1999. The transactions had the purpose and effect of overstating Enron's reported financial results. Specifically, Enron used these transactions to add approximately $60 million to its fourth quarter of 1999 income (improving net income from $199 million to $259 million or 33 percent) and to increase its full year 1999 earnings per share from $1.09 to $1.17.
Simultaneous with the filing of this action, the Commission has agreed to accept Merrill Lynch's offer to settle this matter. Merrill Lynch, without admitting or denying the allegations in the complaint, has agreed to pay $80 million dollars in disgorgement, penalties and interest and has agreed to the entry of a permanent anti-fraud injunction prohibiting future violations of the federal securities laws. The Commission intends to have these funds paid into a court account pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002 for ultimate distribution to victims of the fraud. The four former Merrill Lynch executives named in the complaint, Robert S. Furst, Schuyler M. Tilney, Daniel H. Bayly and Thomas W. Davis, are contesting the matter.
SEC Chairman William H. Donaldson said, "This action is a message to all who would help a reporting company commit fraud: we will bring the full weight of our enforcement arsenal against you. Our commitment to protect investors demands nothing less."
Added Enforcement Director Stephen M. Cutler, "Even if you don't have direct responsibility for a company's financial statements, you cannot turn a blind eye when you have reason to know that what you are doing will help make those statements false and misleading. At the end of 1999, Merrill Lynch and the executives we are suing today did exactly that: They helped Enron defraud its investors through two deals that were created with one purpose in mind -- to make Enron's financial statements look better than they actually were."
As alleged in the Commission's complaint, the first transaction was an asset-parking arrangement whereby on Dec. 29, 1999, Merrill Lynch bought an interest in certain Nigerian barges from Enron with an express understanding that Enron would arrange for the sale of this interest by Merrill Lynch within six months at a specified rate of return. In substance, this transaction was, at best, a bridge loan because the risks and rewards of ownership of the interest in the barges did not pass to Merrill Lynch.
As further alleged in the complaint, Merrill Lynch and the named executives knew that Enron would record $28 million in revenue and $12 million in pre-tax income in connection with this transaction. The Commission alleges that Merrill Lynch and the named executives entered into this transaction solely to accommodate Enron, despite express concerns that Merrill Lynch could appear to be aiding and abetting Enron's earnings manipulation. In 2000, Enron arranged to take Merrill Lynch out of the barge deal on the agreed time frame at the agreed rate of return.
In the second transaction, also closed in the last days of December 1999, Merrill Lynch and Enron entered into two energy options — one physical and one financial — that Merrill Lynch knew had the purpose and effect of inflating Enron's income by approximately $50 million. The complaint details that, at year-end 1999, the trading under these options was not scheduled to begin for approximately nine months. Before the transaction was closed, the complaint alleges, Enron told Merrill Lynch that, despite a nominal term of four years, it might want to unwind this transaction early.
Merrill Lynch believed that the two trades were essentially a wash and knew that the transaction would have a significant impact on Enron's reported results, bonuses, and stock price. Merrill Lynch demanded a multi-million dollar fee for entering into this transaction; Enron ultimately agreed to pay Merrill Lynch a structured fee to be paid over four years with a net present value of $17 million.
In 2000, Enron approached Merrill Lynch seeking to unwind the transaction before trading under the energy options was scheduled to begin. The deal was unwound in June 2000 after Merrill Lynch agreed to reduce its fee to $8.5 million to terminate the transaction.
The complaint alleges that Merrill Lynch and the named executives aided and abetted Enron's violations of the anti-fraud, reporting, books and records, and internal controls provisions of the federal securities laws. For these violations, the Commission seeks in its complaint a permanent injunction, disgorgement, and civil penalties with respect to Merrill Lynch and, with respect to the individual defendants, permanent injunctions, civil penalties, and permanent officer and director bars.
Merrill Lynch offered, and the Commission has agreed, to settle the Commission's charges against the company. Simultaneous with the filing of the complaint, Merrill Lynch filed a consent and final judgment settling the Commission's action against it. In the consent, Merrill Lynch has agreed, without admitting or denying the allegations of the complaint, to be permanently enjoined from violating the anti-fraud, reporting, books and records, and internal controls provisions of the federal securities laws in the future.
Merrill Lynch also has agreed to pay disgorgement, penalties and interest in the amount of $80 million. Specifically, Merrill Lynch will pay $37.5 million in disgorgement, $5 million in prejudgment interest, and a civil penalty of $37.5 million. As noted above, the Commission intends to have these funds paid into a court account pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002 for ultimate distribution to victims of the fraud.
In agreeing to resolve this matter on the terms described above, the Commission took into account certain affirmative conduct by Merrill Lynch. Merrill Lynch terminated Davis and Tilney after they refused to testify before the staff and instead asserted their Fifth Amendment rights. In addition, Merrill Lynch brought the energy trade transaction to the staff's attention at a time when it believed the staff was unaware of its existence.
The Commission acknowledges the assistance provided by the staff of the Federal Energy Regulatory Commission in this investigation.
The Commission also acknowledges the continuing coordination among the Division of Enforcement, the Justice Department Enron Task Force and the Federal Bureau of Investigation in the Enron investigation.
The Commission's investigation into Enron is ongoing.
For further information contact:
•Linda Chatman Thomsen, Deputy Director, Division of Enforcement — (202) 942-4501
•Charles J. Clark, Assistant Director, Division of Enforcement — (202) 942-4731
See Also: SEC v. Merrll Lynch et al. (Litigation Rel. 18038); Remarks by SEC Chairman William H. Donaldson; Remarks by SEC Enforcement Director Stephen M. Cutler
SEC Charges Merrill Lynch With Misleading Pension Consulting Clients
FOR IMMEDIATE RELEASE
Washington, D.C., Jan. 30, 2009 — The Securities and Exchange Commission today charged Merrill Lynch, Pierce, Fenner & Smith, Inc. and two of its former investment adviser representatives with securities laws violations for misleading pension consulting clients about its money manager identification process and failing to disclose conflicts of interest when recommending them to use two of the firm's affiliated services. Merrill Lynch has agreed to settle the SEC's charges and pay a $1 million penalty.
Order in the Matter of Merrill Lynch, Pierce, Fenner & Smith Inc.
Announcement of Order in the Matter of Michael A. Callaway
Order in the Matter of Michael A. Callaway
Order in the Matter of Jeffrey Swanson
Order Granting Waiver in the Matter of Merrill Lynch, Pierce, Fenner & Smith Inc. (Release No. 33-9003)
Order Granting Waiver in the Matter of Merrill Lynch, Pierce, Fenner & Smith Inc. (Release No. 33-9004)
"There has been tremendous growth in the pension consulting business in recent years. This case is an important reminder to firms and their investment adviser representatives that, whenever they sit across the table from their advisory clients, they need to make sure that all material conflicts of interest are disclosed," said Scott W. Friestad, Deputy Director of the SEC's Division of Enforcement.
According to the SEC's order, Merrill Lynch failed to disclose its conflicts of interest when recommending that clients use directed brokerage to pay hard dollar fees, whereby the clients directed their money managers to execute trades through Merrill Lynch. These clients received credit for a portion of the commissions generated by these trades against the hard dollar fee owed for the advisory services provided by Merrill Lynch Consulting Services. Consequently, Merrill Lynch and its investment adviser representatives could and often did receive significantly higher revenue if clients chose to use Merrill Lynch directed brokerage services. The SEC's order finds that Merrill Lynch also failed to disclose a similar conflict of interest in recommending that clients use Merrill Lynch's transition management desk. In addition, the SEC finds that Merrill Lynch made misleading statements to the clients served by its Ponte Vedra South, Fla. office regarding the process used to identify new money managers to present to its clients.
The SEC also charged Michael Callaway and Jeffrey Swanson, who were formerly employed in Merrill Lynch's Ponte Vedra South office.
In a settled enforcement action against Swanson, the SEC finds that he made misleading statements to some of the firm's pension consulting clients regarding the process by which Merrill Lynch assisted them in identifying new managers. As a result, the SEC charged Swanson with aiding and abetting and causing Merrill Lynch's violation of the Investment Advisers Act of 1940. Without admitting or denying the SEC's allegations, Swanson has agreed to a censure, and to cease and desist from committing or causing violations of Section 206(2) of the Advisers Act.
In the contested enforcement action against Callaway, the SEC's Division of Enforcement alleges that Callaway breached his fiduciary duty in making misrepresentations about the manager identification process used by the Ponte Vedra South office and his compensation in connection with transition management services. The Division of Enforcement further alleges that Callaway was a cause of Merrill Lynch's violation of the Advisers Act because he failed to ensure that Merrill Lynch disclosed to clients the conflicts of interest in recommending that clients enter into a directed brokerage relationship with Merrill Lynch and in recommending that they use Merrill Lynch for transition management services. The Division of Enforcement charges that, by this conduct, Callaway willfully aided and abetted and caused Merrill Lynch's violations of Section 206(2) of the Advisers Act.
The SEC charged Merrill Lynch with violations of an anti-fraud provision of the Advisers Act, which does not require a showing of scienter. The SEC also charged Merrill Lynch with failing to maintain certain records and failing to supervise its investment adviser representatives in the Ponte Vedra South office. Without admitting or denying the SEC's allegations, Merrill Lynch has agreed to a censure, to cease and desist from committing or causing violations of Sections 204 and 206(2) of the Advisers Act, and to pay a $1 million penalty.
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For more information, contact:
Scott W. Friestad, Deputy Director, SEC's Division of Enforcement
Laura B. Josephs, Assistant Director, SEC's Division of Enforcement
SEC Charges Merrill Lynch for Misusing Customer Order Information and Charging Undisclosed Trading Fees
FOR IMMEDIATE RELEASE
Washington, D.C., Jan. 25, 2011 — The Securities and Exchange Commission today charged Merrill Lynch, Pierce, Fenner & Smith Incorporated with securities fraud for misusing customer order information to place proprietary trades for the firm and for charging customers undisclosed trading fees.
To settle the SEC's charges, Merrill has agreed to pay a $10 million penalty and consent to a cease-and-desist order.
SEC Order Against Merrill Lynch, Pierce, Fenner & Smith Incorporated
"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 found that Merrill operated a proprietary trading desk between 2003 and 2005 that was known as the Equity Strategy Desk (ESD), which traded securities solely for the firm's own benefit and had no role in executing customer orders. The ESD was located on Merrill's main equity trading floor in New York City, where traders on Merrill's market making desk received and executed customer orders. While Merrill represented to customers that their order information would be maintained on a strict need-to-know basis, the firm's ESD traders obtained information about institutional customer orders from traders on the market making desk. They then used it to place trades on Merrill's behalf after executing the customers' trades. In doing so, Merrill misused this information and acted contrary to its representations to customers.
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.
"Charging these undisclosed mark-ups and mark-downs was improper and contrary to Merrill's agreements with its customers," said Robert B. Kaplan, Co-Chief of the SEC's Asset Management Unit. "Brokers must act honestly and transparently when charging fees to their customers. There is no place in our markets for charging investors undisclosed trading fees."
Without admitting or denying the SEC's findings, Merrill consented to the entry of a Commission order that censures Merrill, requires it to cease-and-desist from committing or causing any violations and any future violations of Sections 15(c)(1)(A), 15(g), and 17(a) of the Securities Exchange Act of 1934 and Rule 17a-3(a)(6) thereunder, and orders it to pay a penalty of $10 million.
In determining to accept Merrill's offer, the Commission considered certain remedial actions undertaken by Merrill after it was acquired by Bank of America.
Brian O. Quinn and Antony Richard Petrilla in the SEC's Division of Enforcement conducted the investigation in this matter with the assistance of John W. Guidroz and Rina R. Hussain of the SEC's Office of Compliance Inspections and Examinations.
# # #
For more information about this enforcement action, contact:
Scott W. Friestad
Associate Director, SEC Division of Enforcement
Robert B. Kaplan
Co-Chief, Asset Management Unit, SEC Division of Enforcement
Brian O. Quinn
Assistant Director, SEC Division of Enforcement
SEC Charges Merrill Lynch With Misleading Investors in CDOs
Firm Agrees to $131 Million Settlement
FOR IMMEDIATE RELEASE
Washington D.C., Dec. 12, 2013 —
The Securities and Exchange Commission today charged Merrill Lynch with making faulty disclosures about collateral selection for two collateralized debt obligations (CDO) that it structured and marketed to investors, and maintaining inaccurate books and records for a third CDO.
Merrill Lynch agreed to pay $131.8 million to settle the SEC’s charges.
The SEC’s order instituting settled administrative proceedings finds that Merrill Lynch failed to inform investors that hedge fund firm Magnetar Capital LLC had a third-party role and exercised significant influence over the selection of collateral for the CDOs entitled Octans I CDO Ltd. and Norma CDO I Ltd. Magnetar bought the equity in the CDOs and its interests were not necessarily aligned with those of other investors because it hedged its equity positions by shorting against the CDOs.
“Merrill Lynch marketed complex CDO investments using misleading materials that portrayed an independent process for collateral selection that was in the best interests of long-term debt investors,” said George S. Canellos, co-director of the SEC’s Division of Enforcement. “Investors did not have the benefit of knowing that a prominent hedge fund firm with its own interests was heavily involved behind the scenes in selecting the underlying portfolios.”
According to the SEC’s order, Merrill Lynch engaged in the misconduct in 2006 and 2007, when its CDO group was a leading arranger of structured product CDOs. After four Merrill Lynch representatives met with a Magnetar representative in May 2006, an internal email explained the arrangement as “we pick mutually agreeable [collateral] managers to work with, Magnetar plays a significant role in the structure and composition of the portfolio ... and in return [Magnetar] retain[s] the equity class and we distribute the debt.” The email noted they agreed in principle to do a series of deals with largely synthetic collateral and a short list of collateral managers. The equity piece of a CDO transaction is typically the hardest to sell and the greatest impediment to closing a CDO. Magnetar’s willingness to buy the equity in a series of CDOs therefore gave the firm substantial leverage to influence portfolio composition.
According to the SEC’s order, Magnetar had a contractual right to object to the inclusion of collateral in the Octans I CDO selected by the supposedly independent collateral manager Harding Advisory LLC during the warehouse phase that precedes the closing of a CDO. Merrill Lynch, Harding, and Magnetar had finalized a tri-party warehouse agreement that was sent to outside counsel, yet the disclosure that Merrill Lynch provided to investors incorrectly stated that the warehouse agreement was only between Merrill Lynch and Harding. The SEC has charged Harding and its owner with fraud for accommodating trades requested by Magnetar despite its interests not necessarily aligning with the debt investors.
The SEC’s order finds that one-third of the assets for the portfolio underlying the Norma CDO were acquired during the warehouse phase by Magnetar rather than by the designated collateral manager NIR Capital Management LLC. NIR initially was unaware of Magnetar’s purchases, but eventually accepted them and allowed Magnetar to exercise approval rights over certain other assets for the Norma CDO. The disclosure that Merrill Lynch provided to investors incorrectly stated that the collateral would consist of a portfolio selected by NIR. Merrill Lynch also failed to disclose in marketing materials that the CDO gave Magnetar a $35.5 million discount on its equity investment and separately made a $4.5 million payment to the firm that was referred to as a “sourcing fee.” The SEC also today announced charges against two managing partners of NIR.
According to the SEC’s order, Merrill Lynch violated books-and-records requirements in another CDO called Auriga CDO Ltd., which was managed by one of its affiliates. As it did in the Octans I and Norma CDO deals, Merrill Lynch agreed to pay Magnetar interest or returns accumulated on the warehoused assets of the Auriga CDO, a type of payment known as “carry.” To benefit itself, however, Merrill Lynch improperly avoided recording many of the warehoused trades at the time they occurred, and delayed recording those trades. Therefore, Merrill Lynch’s obligation to pay carry was delayed until after the pricing of the Auriga CDO when it became reasonably clear that the trades would be included in the portfolio.
“Keeping adequate books and records is not an elective requirement of the federal securities laws, and broker-dealers who fail to properly record transactions will be held accountable for their violations,” said Andrew M. Calamari, director of the SEC’s New York Regional Office.
Merrill Lynch consented to the entry of the order finding that it willfully violated Sections 17(a)(2) and (3) of the Securities Act of 1933 and Section 17(a)(1) of the Securities Exchange Act of 1934 and Rule 17a-3(a)(2). The firm agreed to pay disgorgement of $56,286,000, prejudgment interest of $19,228,027, and a penalty of $56,286,000. Without admitting or denying the SEC’s findings, Merrill Lynch agreed to a censure and is required to cease and desist from future violations of these sections of the Securities Act and Securities Exchange Act.
The SEC’s investigation was conducted by staff in the New York Regional Office and the Complex Financial Instruments Unit, including Steven Rawlings, Gerald Gross, Tony Frouge, Elisabeth Goot, Brenda Chang, John Murray, Sharon Bryant, Kapil Agrawal, Douglas Smith, Howard Fischer, Daniel Walfish, and Joshua Pater. Several examiners in the New York office assisted, including Edward Moy, Luis Casais, Thomas Shupe, William Delmage, George DeAngelis, Syed Husain, and James Sawicki.