March 8, 2005 — Merrill Lynch is being fined $13.5 million for failing to supervise a group of brokers in its Fort Lee, N.J., office who engaged in improper market timing of mutual funds. The New York Stock Exchange imposed a penalty of censure and the fine, and required Merrill Lynch to review its document compliance procedures related to client orders placed in outside accounts.
The NYSE found that from January through April 2002, the brokers executed over 3,700 short-term mutual fund transactions in multiple accounts held for a single hedge fund client at Merrill Lynch. When some of the mutual funds complained, Merrill instructed the brokers not to engage in market timing transactions in the client’s Merrill Lynch accounts, NYSE said. Around August 2002, the brokers, in consultation with company managers, moved the hedge fund’s mutual fund positions to outside accounts they opened at various mutual funds, placing themselves as broker of record and continuing to engage in frequent trading. The brokers later moved the positions back to fee-based accounts at Merrill Lynch.
The NYSE found that Merrill Lynch failed to recognize the brokers’ frequent mutual fund trading in the outside accounts, despite the receipt of commissions paid by the mutual funds, until November 2002. The company ordered the brokers not to trade at the mutual funds but took no additional steps to ensure compliance. The brokers continued to execute trades on behalf of the hedge fund in outside accounts until at least April 2003, NYSE said.
The brokers also purchased a multimillion-dollar variable annuity and other insurance policies on behalf of the hedge fund, and facilitated frequent transactions in the products’ sub-accounts, the NYSE panel found. Merrill failed to record those transactions, including over 3,000 confirmations received from the annuity companies.
Merrill Lynch consented to the penalty without admitting nor denying guilt.
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