Merrill Lynch Poised to Further Lose Over Structured Notes Sales

Merrill Lynch sold approximately $150 million of these volatility notes to approximately 4,000 retail investor.

Vernon Litigation Group, a Florida-based law firm specializing in financial fraud cases, is going after Bank of America’s brokerage arm, operated by Merrill Lynch, accusing the non-independent broker-dealer of disclosure failures in selling securities to retail investors.

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This claim follows a $10 million settlement that Merrill Lynch entered into with the U.S. regulator earlier in June 2016. The SEC and FINRA have collectively levied $15 million in fines against the firm for failing to disclose material facts in its sales of the so-called strategic return notes that were promoted “as a hedge against potential downturns in the equities markets”.

According to the claim filed by Vernon Litigation Group, a pair of whistleblowers helped investigators through providing details of the structured products after taping conversations with other bank employees before leaving the company. The former advisors suggested that the clients sell their investment at a loss, recognizing that there was something “structurally wrong” with how the investment was working.

Vernon’s complaint accuses Merrill Lynch of several sets of violations including the failure to adequately disclose certain costs and its impact on performance; breach of regulatory rules; provide misrepresentations of the product facts to claimants; fraud, and breach of industry rules.

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According to the SEC’s investigations in the same case, the brokerage offered “materials emphasized that the notes were subject to a 2 percent sales ‎commission and 0.75 percent annual fee. Due to the impact of these costs over the ‎five-year term of the notes, the volatility index would need to increase by 5.93 ‎percent from its starting value in order for investors to earn back their original ‎investment on the maturity date.”

However, the offering materials failed to adequately ‎disclose a third cost included in the volatility index known as the “execution factor” ‎that imposed a cost of 1.5 percent of the index value each quarter.‎

Investment in structured products such as Merrill Lynch’s offering is a money-making machine for Wall Street. It has increased drastically in recent years with banks selling $40 billion to $50 billion of structured notes annually.  But, from the investor’s perspective, the practical experience proved that such structured products are burdened with costs and risks that far outweigh the benefits.

Vernon Litigation Group seeks punitive damages as well as compensatory damages as a result of the institutional based wrongdoing.


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