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Merrill Lynch to Pay $42 Million Penalty for Obscuring Trade Locations

The brokerage firm, Merrill Lynch Pierce Fenner & Smith Inc. ("Merrill Lynch"), agreed on June 19, 2018 to pay a $42 million fine to the U.S. Securities and Exchange Commission ("SEC") for misleading its customers as to where their trades actually occurred. This agreement follows a previous $42 million fine in March settling identical allegations from the office of the New York Attorney General.

The SEC described the scheme, which took place over a five-year period, in a ten-page administrative proceeding order. The order accuses Merrill Lynch of "masking" its trades, meaning the firm told customers it was completing trades internally, while, in reality, it sent out millions of these orders to other brokerage firms. This practice allowed Merrill Lynch to get around fees charged in connection with executing trades.

Merrill Lynch was able to hide the truth about the location of its trades from its customers by making it appear as though they occurred in-house instead of at external liquidity providers ("ELPs"). The SEC order noted how "[a]t first, Merrill Lynch employees manually deleted ELPs from customers' monthly bills. Merrill Lynch eventually automated the process" by rigging its systems to hide the ELPs.

Although Merrill Lynch ceased masking trades in May of 2013, the firm did not enlighten its customers of its past practice. In fact, the SEC alleges Merrill Lynch actually "took additional steps to hide its misconduct."

Co-director of the SEC's Enforcement Division, Stephanie Avakian, explained that "By misleading customers about where their trades were executed, Merrill Lynch deprived them of the ability to make informed decisions regarding their orders and broker-dealer relationships." Indeed, some Merrill Lynch customers specifically asked that their trades not be executed by ELPs, citing concerns of exposure to "information leakage."

"Institutional traders often make careful choices about how and where their orders are sent out of a concern for information leakage," stated the SEC's Enforcement Division's Market Abuse Unit chief, Joseph Sansone. "Because of masking, customers who had instructed Merrill Lynch not to route their orders to third-party broker-dealers did not know that Merrill Lynch had disregarded their instructions."

Addressing the March settlement with the New York Attorney General, Merrill Lynch claimed that "At all times we met our obligation to deliver the best prices to clients. About five years ago, we addressed the issues concerning communicating to clients about where their trades were executed." The firm also asserted that the allegations addressed activity from as far back as a decade ago.

The SEC estimated Merrill Lynch deceived customers using its masking practice in trades of more than 5.4 billion shares, totaling approximately $141 billion.

The legal team at Shepherd, Finkelman, Miller & Shah, LLP ("SFMS") has significant experience litigating securities matters. If you have any questions regarding this subject or this posting, please contact Nick Lussier ([email protected]) or Chiharu Sekino ([email protected]). We can also be reached toll-free at (866) 540-5505.

SFMS is a law firm with offices in California, Connecticut, Florida, New Jersey, New York, and Pennsylvania. SFMS is an active member of Integrated Advisory Group (www.iaginternational.org), which provides us with the ability to provide our clients with access to excellent legal and accounting resources throughout the globe. For more information about our firm, please visit us at www.sfmslaw.com.

Sources

Prial, Dunstan. "Merrill Lynch Fined $42M In 5-Year Trade Execution Scam." Law 360. Last modified on June 19, 2018.

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