Merrill Lynch

SEC Submits Amended Complaint Against Bank of America Over Merrill Lynch Merger and Executive Bonuses

Published on: December 3, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission’s amended complaint regarding the acquisition of Merrill Lynch by Bank of America Corp. last January includes one new assertion. In addition to the SEC’s original allegations against Bank of America, the agency now says that the investment bank was in violation of proxy regulations when it did not provide a merger agreement schedule, as well as a list identifying what would have been included in the schedule.

At the center of the SEC lawsuit is Bank of America’s proxy disclosure to shareholders that it wouldn’t pay year-end bonuses to Merrill executives. Yet, even as Merrill posted a record $27.8 billion loss last year, its executives were paid $3.6 billion.

BofA and the SEC initially attempted to settle the allegations for $33 million. Federal Judge Rakoff, however, wouldn’t sign off on what he considered both a swift resolution to an embarrassing situation for the bank and an attempt to make it appear as if the SEC was engaged in enforcement.

Rakoff accused SEC of not being hard enough on Bank of America, which it is supposed to regulate, even as shareholders suffered. He also accused the defendant of neglecting to take responsibility for its actions, which forced taxpayers to bail out the investment bank. A trial is scheduled to begin on March 1.

The US Congress and New York Attorney General Andrew Cuomo are also investigating the merger between Bank of America and Merrill Lynch.

Throughout the US, our securities fraud law firm represents investors who have suffered financial losses because of broker-dealer misconduct.

Related Web Resources:
SEC’s Amended BofA Complaint: New Claims, but No New Defendants, Law.com, October 23, 2009
Judge Rejects Settlement Over Merrill Bonuses, NY Times, September 15, 2009
SEC Fines Bank Of America $33 Million Over Bonuses, Consumer Affairs, August 3, 2009 Continue Reading ›

Former Merrill Lynch Employee, Guilty of $1.4 Million Texas Securities Fraud Scheme, Receives Prison Term

Published on: October 5, 2009 | by Shepherd Smith Edwards & Kantas, LLP

A judge has ordered a former Merrill Lynch employee, San Antonio stockbroker Bruce E. Hammonds, to serve almost five years in prison and three years supervised release for Texas securities fraud. Bruce E. Hammonds also must pay $1.1 million in restitution to the Merrill Lynch investors he defrauded and almost $60,000 to two clients that he continued to defraud after the broker-dealer fired him in June 2008.

Hammonds reportedly did not deny the alleged fraud when Merrill Lynch confronted him about his activities. The broker-dealer has paid the investment fraud victims back in full.

According to the criminal complaint affidavit, Hammonds opened a working capital account under the name B & J Partnership.He was supposed to register the account in an internal monitoring system, which he never did. Instead of placing investors’ funds in a Merrill Lynch fund, he deposited $1.4 million of their money in his working capital account. He provided clients with charts demonstrating the performance of the B&J Partnership investment fund even though no such fund existed.

Hammonds pleaded guilty to federal securities fraud charges earlier this year after an investigation found that between August 2006 and October 2008, Hammonds didn’t invest clients’ funds in stocks and hedge funds. Instead, he used the money for personal purposes, including an alleged house-flipping business. He gave back $486,000 to clients so it would appear as if they had made money off their investments.

Related Web Resources:
Judge sends ex-stockbroker to jail for bilking investors, Business Journal, October 2, 2009
Stockbroker sent to prison for $1.4 million scheme, My San Antonio, October 3, 2009 Continue Reading ›

Bank of America’s Merrill Lynch unit agrees to $26.5 million national settlement stemming from Texas securities fraud claim

Published on: September 22, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Following a Texas securities fraud claim that Bank of America‘s Merrill Lynch, Pierce, Fenner & Smith Inc. allowed unregistered sales persons to sell securities, the Bank of America unit has agreed to pay $26.5 million as part of a national settlement over the allegations. The state of Texas’s portion of the settlement is $1.6 million. The other states that were part of the task force, led by the Texas State Securities Board, are Arizona, Colorado, Vermont, Missouri, Delaware, and New Hampshire.

Client associates who accept trade orders must be registered not just in their own state but also in the client’s state. Per the probe, the task force determined that Merrill did not have a supervisory system that was designed in a manner that made sure that associates were in compliance with registration requirements. The task force was investigating a tip, provided in May 2008 by a Merrill Lynch employee, that the company saved money on registration fees by allowing client associates to register only in their home state and in a neighboring state.

Last week, Merrill Lynch agreed to pay the state of Texas another $12.7 million over a Texas securities fraud cause involving auction-rate securities. The settlement ends the state’s probe into the broker-dealer’s handling of ARS and clients’ funds even as the market was collapsing.

The board determined that not only did Merrill Lynch not tell investors that the market could very well collapse, but also that the broker-dealer offered financial associates sales incentives to sell ARS despite knowing that the auction process could fail.

September has been a rough month for Bank of America and Merrill Lynch. On the same day that the Texas securities commissioner announced the $26.5 million settlement, New York Attorney General Andrew Cuomo accused high-level Bank of America Corp. executives of failing to reveal key information about its Merrill Lynch & Co. takeover. Cuomo is threatening to press charges. Bank of America, however, is calling Cuomo’s allegations “spurious.”

BofA’s Merrill to pay US$26.5M in settlement on unregistered salespeople, AP/Yahoo, September 8, 2009
Bank of America Calls Cuomo’s Merrill Allegations ‘Spurious,’ Bloomberg.com, September 10, 2009
Merrill Lynch pays $12.7M to settle Texas auction rate securities case, Taragana.com, September 14, 2009 Continue Reading ›

$150 Million Settlement in Merrill Lynch Securities Fraud Lawsuit is Granted Preliminary Approval by District Court Judge

Published on: September 8, 2009 | by Shepherd Smith Edwards & Kantas, LLP

A district court judge issued his preliminary approval of a proposed $150 million settlement in the securities class action lawsuit against Merrill Lynch. The securities fraud lawsuit was filed for purchasers of specific Merrill Lynch preferred securities and bonds.

The plaintiffs of the Bond Action had invested in over $24 billion in preferred debt and securities that the broker-dealer had made available to the public between October 2006 and May 2008. The lead plaintiffs in the securities class action lawsuit were the Louisiana Municipal Police Employees’ Retirement System and the Louisiana Sheriffs’ Pension and Relief Fund. They pursued their claims under the Securities Acts’ Sections 11, 2, and 15.

In addition to Merrill Lynch, a number of the company’s officers and directors, as well as the offering underwriters, are named as defendants in the complaint.

The lawsuit claims that offering documents for certain securities offerings did not accurately reveal the “existence and the value of tens of billions of dollars of complex derivative securities linked to subprime mortgages” that were contained in Merrill’s balance sheet. Such exposures allegedly almost “wiped out” the broker-dealer by September 2008 and nearly caused Bank of America, Merrill’s acquirer, to “topple.” A federal bailout helped rescue the merger.

The parties had previous agreed to a $475 million settlement, in addition to a $75 million settlement for a related class action per ERISA.

The defendants went into the settlement even though the motions to dismiss the amended complaint were pending. A November 23 hearing for granting final approval is now scheduled.

Related Web Resources:
BofA to settle Merrill lawsuit for $150 million, Reuters, August 24, 2009

Louisiana Municipal Police Employees’ Retirement System

Louisiana Sheriffs’ Pension and Relief Fund
Continue Reading ›

Disgruntled Investors Continue to File Securities Fraud Litigation Against Merrill Lynch Even Eight Months After Its Acquisition by Bank of America Corp.

Published on: September 2, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The plaintiffs of some 166 of the 221 cases filed against Merrill Lynch & Co. since January 1, 2009 are alleging securities fraud-related violations. This means that Bank of America Corp, which acquired the broker-dealer at the beginning of the year, has assumed responsibility for the outcome of these civil cases. Some of these investor fraud claims were filed as late as last month.

Some cases discuss Merrill’s involvement in the marketing, underwriting, and selling of securitizations, or asset-backed securities. Other cases delve into Merrill’s dealings in the auction-rate securities market. A number of the securities fraud cases against Merrill are class action lawsuits. Merrill Lynch is the lead defendant in many of the cases and one of several financial firms named in the other complaints.

Some of the Securities Fraud Cases Against Merrill Lynch:

UBS AG and Merrill Lynch Collectively Fined $250,000 by FINRA for Closed-End Fund Actions

Published on: August 12, 2009 | by Shepherd Smith Edwards & Kantas, LLP

UBS Financial Services Inc. has agreed to be fined $100,000 and Merrill Lynch, Pierce, Fenner & Smith Inc. has consented to a $150,000 fine, says the Financial Industry Regulatory Authority, for alleged supervisory failures that resulted in the inappropriate short-term sales of closed-end funds that were bought at initial public offerings for the funds. By agreeing to settle, the broker-dealers are not deny or admitting to the FINRA charges. They are, however, consenting to the findings.

FINRA also announced that it was suspending five Merrill Lynch brokers for 15 days. Each of them must pay a $10,000 fine for allegedly making fund recommendations that were unsuitable for investors.

Merrill Lynch brokers that FINRA has sanction include:

• Kenneth C. Iwelumo (his clients lost about $563,000)
• Joseph Miller (approximately $130,000 in client losses)
• Ronald Kemp (about $411,000 in customer losses)
• Michael Kizman (about $210,000 in losses)
• John Ong (about $350,000 in client losses)

The investigation into the activities of a number of former UBS brokers is ongoing.

Closed-End Funds
Closed-End Funds are investment companies that sell a fixed number of shares during an initial public offering. These sales come with built-in sales charges. The CEF’s at issue came with a 4.5% sales charges and a 30-90 day penalty bid period after the IPO. If a client sold the CEF that had been purchased at the IPO during this time period, the broker would lose the commission.

FINRA says that both broker-dealers knew that CEF’s bought at IPO’s are more appropriate for long-term investments and that because of the sales charges that come with their purchases, it is inappropriate to engage in the short-term trading of CEF’s. FINRA claims that Merrill Lynch and UBS did not have the proper supervisory procedures and systems in place so that brokers couldn’t and/or wouldn’t make such unsuitable CEF sales.

FINRA also says that both broker-dealers failed to warn supervisors about the potential issues that could result from such activity and did not properly train registered individuals. Due to this improper supervision, brokers for Merrill and UBS recommended that certain clients engage in short-term sales of CEF’s bought at IPOs without fully understanding the financial ramifications these recommendations would have on their clients’ finances.

FINRA is concerned about brokers who convince customers to buy CEF’s during their IPO’s and then wait until after the penalty bid period is over to recommend that clients sell the CEF’s-usually at a loss. These brokers then recommend that clients use the proceeds from the sale to purchase more CEF’s at initial public offerings.

FINRA Fines Merrill Lynch, UBS for Supervisory Failures in Sales of Closed-End Funds; Customers Get More Than $5 Million in Remediation, FINRA, July 28, 2009
Merrill, UBS Are Fined in Closed-End-Fund Case, The Wall Street Journal, July 29, 2009 Continue Reading ›

Merrill Lynch & Co. Sued Over Auction-Rate Securities by Teva Pharmaceutical Industries Ltd. and Seneca Gaming Corp.

Published on: August 7, 2009 | by Shepherd Smith Edwards & Kantas, LLP

On Wednesday, Teva Pharmaceutical Industries Ltd. sued Merrill Lynch & Co., a Bank of America Corp. unit. The pharmaceutical company’s securities fraud lawsuit accuses the brokerage firm of making misrepresentations that resulted in its purchase of $273 million in ARS. Merrill Lynch underwrote the securities that Teva bought. A day later, Seneca Gaming Corp. filed its own lawsuit against Merrill Lynch. The complaint is over a $5 million tranche of ARS backed by mortgages that the company had purchased.

While the agreements that brokerage firms have reached with regulators generally require that the former buy back auction-rate securities from small companies, individual investors, and nonprofits, the broker-dealers are only required to work with bigger investors or try their best to help them deal with their illiquidity issues. As a result, some large investors are taking matters into their own hands by filing securities fraud claims and lawsuits. These investors include Bankruptcy Management Solutions Inc., Braintree Laboratories, Ocwen Financial Corp. Ashland Inc., and Texas Instruments. Other large companies will likely follow suit.

For the large investors that are undecided on what action to take regarding their frozen ARS, it is important from them to realize that more financial losses are likely.

Bank of America Agrees to settle SEC Charges of Merrill Lynch Bonuses for $33 Million But Judge Blocks Settlement

Published on: August 6, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Although Bank of America has agreed to settle charges by the Securities and Exchange Commission that the broker-dealer misled investors about Merrill Lynch bonuses worth billions of dollars, a federal judge is withholding approval for the $33 million penalty. The U.S. District Court for the Southern District of New York Judge Jed S. Rakoff has scheduled a hearing for Monday to discuss the matter.

Without denying or admitting to the charges, Bank of America had consented to pay the amount. The SEC has accused Bank of America of failing to notify investors about plans to pay top Merrill executives $5.8 billion in bonuses for the 2008 fiscal year. Regulators say that instead, the brokerage firm told investors that year-end performance bonuses were not going to be given out.

It wasn’t until February when New York State Attorney Attorney General Andrew Cuomo accused Merrill Lynch of secretly issuing the rewards to its executives before its merger with Bank of America that news of the bonuses was revealed. Investigators also found out Merrill had bumped up the date of its end-of-year bonus payments and that Bank of America had let Merrill pay the bonuses to its executives.

Scott Silvestri, a Bank of America spokesperson, says the settlement is a “constructive conclusion” to the dispute. The SEC’s charges against Bank of America is the first case that the federal government has brought against a financial firm that has been closely linked to the ongoing financial crisis.

There are, however, critics who are not satisified with the settlement. The Washington Post quotes Rep. Dennis J. Kucinich (D-Ohio) of criticizing the settlement amount. The head of the House Oversight and Government Reform subcommittee noted that it pays in America to commit a corporate crime. Former SEC chief accountant Lynn Turner expressed disappointment that no executives were charged with any wrongdoing.

Bank of America has complained that federal regulators pressured the broker-dealer to make the deal with Merrill, which was in financial trouble at the time.

Related Web Resources:
Judge Blocks BoA Settlement, Washington Post, August 6, 2009
Judge raps $33m bank bonus fine, BBC, August 6, 2009
Bank of America Pays $33 Million to Settle Merrill Bonus Charges, Washington Post, August 4, 2009 Continue Reading ›

Merrill Lynch Life Agency to Pay Illinois Division Of Insurance $18 Million Over Funeral Trust Scam Allegations

Published on: May 27, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Merrill Lynch Life Agency Inc. will pay $18 million to the Illinois Division of Insurance to settle the state’s investigation into the investment firm’s involvement with a trust fund overseen by the Illinois Funeral Directors Association. The trust was supposed to cover funeral costs for about 49,000 consumers that had prepaid for funeral contracts. The $18 million will be placed in a special fund and will be used to offset losses by association members when delivering on their funeral contract commitments to consumers.

Merrill Lynch & Co. Inc, between 1986 and 1999, had marketed and sold tax-exempt variable universal life insurance policies as investments within the pre-need trust. Unfortunately, in 2007, the trust imploded, and its value dropped from over $300 million to approximately $250 million.

The Illinois Department of Financial and Professional Regulation then conducted a probe into the trust and discovered that the funds’ trustees had used the policies as investments within the trust. Also state comptroller Dan Hynes is asking the association to account for $10 million that trustees allegedly obtained from the trust as excess management fees.

According to state regulators, Merrill Lynch Life registered representative Edward L. Schainker, who served as the association’s investment advisor, recommended and sold over 300 policies to its members. The policies were to offer tax-exempt investment returns. Merrill Lynch’s life insurance division put forth 120 policies and received over $32 million in premiums that were invested in bonds and stocks that over the years have dropped in value and placed the trust’s solvency at risk.

Schainker is accused of violating Illinois insurable-interest laws and of failing to determine whether his investment plan could provide the needed revenue to cover trust liabilities. The Illinois secretary of state’s office has suspended his broker’s license and the state’s insurance division is seeking to revoke Schainker’s insurance license. He also has been ordered to pay civil penalties of $100,000.

By settling, Merrill Lynch Life is not admitting to the allegations made by the state of Illinois.

Related Web Resources:
Merrill Lynch to pay $18 million to halt state probe into funeral trust fund, Chicago Tribune, May 20, 2009
Illinois slams Merrill Lynch Life to the tune of $18M for funeral trust scam, Investment News, May 21, 2009
Illinois Funeral Directors Association

Illinois Department of Financial and Professional Regulation
Continue Reading ›

Merrill Lynch Cannot Prevent Former Brokers From Using Customer Information and Soliciting Clients, Says District Court

Published on: April 20, 2009 | by Shepherd Smith Edwards & Kantas, LLP

A motion by Merrill Lynch, Pierce, Fenner & Smith Inc. to stop two former financial advisers from using customer information they received while working at the investment firm has been denied. In the U.S. District Court for the District of Utah, Judge Dale Kimball says Merrill neglected to show that it would suffer irreparable harm if that relief wasn’t granted or that public interest/ the balance of that harm is in its favor.

Per the court, Paul Aiman started working for Merrill as a financial adviser in 1989 and Rex Baxter was hired to do the same in 1997. Both men resigned from the firm on April 3 to work for Ameriprise Financial Services. Merrill countered by trying to obtain a temporary restraining order preventing the former employees from using customer data the two now ex-advisers allegedly misappropriated.

Merrill asked the U.S. District Court for the District of Utah to enjoin the two men from soliciting its clients and making them give back or “purge” all documents and data that they had allegedly illegally misappropriated, such as client contact information, financial statements, account figures, assets, investment goals, net worth, investment histories, and other financial data.

The court, however, said that to receive preliminary injunctive relief or a TRO, the moving party must show that:

• There was a good chance of succeeding on the merits.
• The possibility of injury surpasses the harm that the opposing party might experience.
• Relief is in the public interest.
• Irreparable harm will occur unless relief is granted.

In regards to irreparable harm, the court said that Merrill’s argument that because the two men worked with 180 clients with millions of dollars in assets it was not possible to determine damages if relief is not granted is “outdated” since all transactions are electronically monitored. The court also said that there is no clear evidence that the defendants even possess any of the clients’ financial information and that any customer information they might have could easily be accessed through regular sources, such as telephone directories. The court noted that it is not unusual for brokers to move to a different brokerage firm, bringing their client lists with them, and that preventing the two men from using these lists could hamper their careers-causing them great harm.

Also, the “diminished public interest” in Merrill’s enforcement of non-solicitation agreements-considering that many brokerage firms opt not to enforce such agreements-and the public interest in a client being able to keep working with their chosen financial adviser do not indicate that the “public interest” factor weighs in Merrill’s favor.

The parties will now take their case before an arbitration panel.
Continue Reading ›