From Mark Hamblett, From New York Law Journal
Gambling with customer money that was supposed to be set aside for its own rainy day cost Bank of America’s Merrill Lynch $415 million in a settlement Thursday and prompted a stepped-up enforcement and monitoring effort by the U.S. Securities and Exchange Commission.
Andrew Ceresney, director of the SEC’s Division of Enforcement, said Thursday the commission is launching a two-part initiative to prevent abuse of the Customer Protection Rule as he announced the largest settlement ever for a violation of the rule.
Merrill Lynch admitted wrongdoing in violating of the rule by using billions that were supposed to be set aside in a reserve account to make trades that would otherwise have been more expensive to finance, essentially getting a free ride with money parked to make investors whole in case broker-dealers fail.
Ceresney said during a media call Thursday that Merrill Lynch used up to $5 billion a week to finance trading between 2009 and 2012, swapping funds in maneuvers that “essentially boiled down to instantaneous round-trip transactions,” that had no economic substance.
The trading desks, Ceresney said, “obtained what were in effect interest-free loans.”
Merrill Lynch also violated the rule, the SEC release said, by failing to ensure that it fully paid for customer securities held in lien-free accounts. It held up to $58 billion per day in an account that was subject to a general lien, leaving its customers exposed should Merrill Lynch collapse.
Ceresney said that, from now on, broker-dealers who self-report violations of the rule will get credit for cooperation and favorable settlement terms in any enforcement action.
Second, there will be examinations of broker-dealers to ensure they are complying with the rule.
Ceresney also announced a settlement in a case that will encourage whistleblowing, which helped the SEC make its case. Merrill Lynch violated Exchange Act Rule 21F-17 by using language in severance agreements to impede employees from talking to the SEC. As part of the deal, Merrill Lynch agreed to revise its severance agreements and have mandatory whistleblower training.
Finally, Merrill Lynch also settled, without admitting wrongdoing, a charge that it didn’t disclose the actual costs in fees for some 4,000 investors in structured notes that were linked to the Investable Volatility Index, or VOL. It agreed to pay $10 million to the SEC and another $5 million to the Financial Industry Regulatory Authority.
The SEC said separately there would be a litigated administrative proceeding against William Tirrell, who was head of regulatory reporting for Merrill Lynch when the firm was abusing the consumer protection rule. Tirrell’s attorney, Steven Witzel of Fried, Frank, Harris, Shriver & Jacobson, released a statement saying Tirrell was “justifiably proud of his distinguished 35-year career and leadership positions in the securities industry” and “looks forward to vindicating himself at trial.”
Critical to the investigations that led to the settlements was information from multiple whistleblowers who are executives at Bank of America.
Representing the whistleblowers was Jordan Thomas, chairman of Labaton Sucharow’s whistleblower representation practice who over the last five years has represented “dozens and dozens” of people who have come forward to report corporate malfeasance.
His clients in the Merrill Lynch case, he said, “had the same concerns that other whistleblowers have, which is retaliation and blacklisting within the industry.”
“One of the things I tell them is the best protection against retaliation and blacklisting is the ability to report it anonymously, and that sophisticated counsel use other techniques to further shield their identify, such as being very careful about the kind of documents that are provided to the commission,” Thomas said in an interview Thursday.
Merrill Lynch is represented by Nader Salehi of Sidley Austin.
Bill Halldin, spokesman for Merrill Lynch, issued a statement Thursday.
“While no customers were harmed and no loses were incurred, our responsibility is to protect customers’ assets and we have dedicated significant resources to reviewing and enhancing our processes,” Halldin said. “The issues related to our processes and controls have been corrected and we’ve cooperated fully with the SEC staff through this investigation.”
IMAGE: Headquarters of the U.S. Securities and Exchange Commission in Washington D.C. NLJ/Diego M. Radzinschi

For more on this story go to: http://www.newyorklawjournal.com/id=1202760831638/415M-Merrill-Lynch-Settlement-Spurs-SEC-to-Boost-Enforcement?mcode=0&curindex=0&curpage=ALL