On January 25, Merrill Lynch Pierce Fenner & Smith Inc. settled with
the SEC on charges of securities fraud. The SEC had alleged that the firm
inappropriately used customer information and that it charged investors
undisclosed trading fees. In the settlement, the firm agreed to pay a
$10 million penalty (“Merrill ponies up $10M to settle ‘clearly
inappropriate' actions,” InvestmentNews, Jan. 25, 2011).
As reported in the article, the SEC charged the firm with allowing “improper
access” of customer order information to the firm’s proprietary
traders. According to anSEC press release, the firm allowed its Equity Strategy Desk to obtain information about
customer orders, information which clients were told would be released
only on a “need-to-know basis,” and then execute orders for
the firm (strictly on the firm’s behalf) after the customers’
orders were placed.
Scott W. Friestad, Associate Director in the SEC's Division of Enforcement,
was quoted in the press release: "The conduct here was clearly inappropriate.
Merrill's proprietary traders had improper access to information about
the firm's customer orders, and misused it to place trades on the
The SEC’s complaint further alleged that Merrill filled customer
orders at prices other than those at which Merrill bought or sold the
securities in the market, with unfavorable results for the customers.
The SEC said the firm’s “undisclosed mark-ups and mark-downs”
were “improper and contrary” to its customer agreements.
Merrill declined to comment on the SEC’s allegations.