NEW YORK (HedgeWorld.com)–There’s a new parade of settlements winding through mutual fund town, and the participants, while new, have a familiar look about them.
On Tuesday, Merrill Lynch, Pierce, Fenner & Smith Inc. became the latest firm to settle charges that it allowed a market timing of mutual fund shares by hedge fund clients, including some via variable annuities. In separate agreements with New York Stock Exchange regulators and the State of New Jersey Attorney General’s Office, Merrill Lynch agreed to pay a total of US$13.5 million in fines and undertake a review and strengthening of its procedures for stamping out market timing. The firm did not admit to or deny the allegations, which were originally brought by the New Jersey Bureau of Securities.
Merrill Lynch will pay US$10 million to the State of New Jersey to settle allegations against three employees of a Merrill office in Fort Lee, and US$3.5 million to the State of Connecticut to satisfy a pending settlement there. Merrill also agreed to review its procedures for creating and retaining documents related to placing trade orders with outside firms on behalf of Merrill clients, and to make sure those procedures are in line with exchange rules and federal securities laws, according to a news release from the NYSE. And the firm will reform its supervisory procedures to ensure that the alleged trading abuses don’t happen again.
Merrill’s troubles began in January 2002, when it hired three financial advisers to work in its Fort Lee office. The three advisers–Christopher Chung, Kevin Brunnock and William Savino–brought with them a hedge fund client, Millennium Partners LP, New York, that used market timing to generate returns. Millennium Partners has a history of mutual fund trading abuse. In October 2003, Millennium trader Steven B. Markovitz agreed to a lifetime ban from the securities industry for late trading, or placing mutual fund trade orders after the 4 p.m. ET market close but at pre-4 p.m. prices, thus gaining the advantage of trading on post-close news.
The market timing linked to Merrill involved rapid trading of mutual fund shares in order to profit from short-term price movements. Market timing is not illegal, but regulators have argued it negatively affects ordinary mutual fund shareholders by depressing returns and passing on to those shareholders the costs of the rapid trades.
According to investigations by the NYSE and the New Jersey attorney general, the three Merrill advisers continued to place market-timing trades on behalf of Millennium Partners even after they were warned that such trades violated Merrill Lynch’s policies. New Jersey officials alleged that rather than suspend the Millennium trading, the three Merrill advisers took steps to conceal it, by using non-Merrill Lynch accounts to conduct the trading.
When the mutual funds got wise to the trading, the Merrill Lynch advisers simply opened new accounts, or moved on to other funds, or began using mutual fund sub-accounts of variable annuities offered by insurance companies, New Jersey officials alleged. Merrill Lynch kept no documentation of the trades it placed through the outside entities. As part of the settlement, the firm agreed to keep such records in the future.