Merrill Lynch will pay $15.7 million to settle allegations that its employees misled mortgage bond customers and overcharged those customers residential mortgage-backed securities trades during a three-year period from 2009 through 2012, the Securities and Exchange Commission announced Tuesday.
According to the SEC, an investigation found that Merrill Lynch RMBS traders and salespeople tricked the bank’s customers into overpaying for mortgage bonds by lying about the price Merrill Lynch paid to acquire the securities.
For those unfamiliar with RMBS trading, mortgage bonds are not publicly traded on an exchange and pricing information for the bonds is not publicly available. Therefore, RMBS buyers and sellers use broker-dealers to execute individually negotiated transactions.
In its investigation, the SEC found that Merrill Lynch RMBS traders deceived customers about the prices of mortgage bonds, raising the prices in order to make more money on the deals.
“During the Relevant Period, Merrill personnel who purchased and sold non-agency RMBS made false or misleading statements, directly and indirectly, to Merrill customers and/or charged Merrill customers undisclosed excessive mark-ups,” the SEC said in its order. “By engaging in this conduct, Merrill personnel acted knowingly or recklessly.”
According to the SEC, Merrill Lynch’s RMBS traders and salespeople illegally profited from excessive, undisclosed commissions, which, in some cases, were more than double what the customers should have paid.
The SEC also stated that Merrill Lynch had policies that prohibited traders from making false or misleading statements and the ability to monitor traders’ communications for such statements.
But the SEC stated that the company failed to “reasonably” implement procedures to monitor and prevent those types of “false or misleading” statements.
“Merrill also had policies that prohibited excessive mark-ups and procedures to monitor for excessive mark-ups on transactions in non-agency RMBS, but the policies and procedures were not reasonably designed and implemented,” the SEC said. “Due to these deficiencies, Merrill failed reasonably to perform a meaningful review of potentially excessive mark-ups on certain non-agency RMBS transactions, including transactions that are the subject of the Order.”
The SEC found that that the Merrill Lynch traders violated antifraud provisions of certain federal securities laws and that Merrill Lynch failed to reasonably supervise the traders.
“In opaque RMBS markets, lying to customers about the acquisition price can deprive investors of important information,” said Daniel Michael, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. “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.”
As part of the settlement agreement, Merrill Lynch will pay a fine of $5.2 million to the SEC and will repay more than $10.5 million to its customers.
Merrill Lynch neither admits to nor denies the SEC’s findings, but agrees to be censured by the SEC.
In a statement provided to HousingWire, Merrill Lynch said these issues have long since been remedied.
“We have addressed issues raised in this matter, which occurred between 2009 and 2012, and taken steps to improve our procedures,” the company said in its statement.
