The Securities and Exchange Commission (SEC), a US regulator, announced on Tuesday that it will be fining Merrill Lynch, Pierce, Fenner & Smith Inc (Merrill Lynch) $5.2 million. The fine stems from deals involving residential mortgage-backed securities (RMBS) and the broker-deal will also have to pay back $10.5 million to customers.
Over the course of its investigation, the SEC found that Merrill Lynch, a Bank of America subsidiary, had lied to its customers regarding the pricing of RMBS. Traders and salespeople working for the firm were able to convince customers to overpay for the securities by lying about how much they had paid for them.
On top of this, the same traders and salespeople massively overcharged for commissions. The SEC noted that, in some cases, they received double what they should have.
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Why the fine?
Merrill Lynch will be charged as these traders and salespeople violated antifraud securities laws. The SEC found that the company did not fulfill its supervisory duties and was therefore unable to prevent the lawbreaking from occurring.
The company did not admit or deny any of the investigation’s findings. Instead, it agreed to pay a $5.2 million fine to the SEC and pay back $10.5 million to the customers involved in the fraudulent transactions.
Commenting on the decision, Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, said: “lying to customers about the acquisition price can deprive investors of important information. The Commission found that Merrill Lynch failed in its obligation to supervise traders who allegedly used their access to market information to take advantage of the bank’s own customers.”
It is unclear what will happen to the Merrill Lynch employees who partook in the fraudulent behavior but they should be extremely thankful. In the past couple of years, traders have been sent to prison for mis-selling RMBS in the same manner as they did.