Each seeking a future in finance, young college graduates Charles Merrill and Edmund Lynch met in New York in the early 1900’s. Participants in the stock market at the time were only a few businessmen, but Merrill envisioned a wider group of investors through what he called “people’s capitalism”. He worked for an investment house until he was able to start his own firm in 1914, then persuaded Lynch to join him.
The company grew quickly as financial chain store and participated in the boom of the 1920s. Yet, Charles Merrill became uneasy and, in 1928, he correctly predicted bad times, warned his clients and prepared the firm for a downturn. After the 1929 crash, the partners decided to concentrate on investment banking and, in 1930, sold their retail business to a nationwide branch network firm connected by teletype, E.A. Pierce & Company. When that firm struggled, Merrill was persuaded to re-unite with it in 1939.
A New Orleans commodities firm was bought in 1941, creating Merrill Lynch, Pierce, Fenner & Beane (no comma between Merrill and Lynch). The new firm was a “department store of finance” and the nation’s largest “wire house.” In 1958, Beane left and managing partner Winthrop Smith’s name was added and the firm became Merrill Lynch, Pierce, Fenner & Smith. In 1959 it became the first such firm to incorporate.
Donald T. Regan was named head of Merrill Lynch, in 1968. Two years later, the company was a victim of Wall Street’s “paper crunch,” when firms generated more transactions than their accounting departments could handle. In 1971, Merrill Lynch went public. It soon began a series of acquisitions of brokerage and other investment firms, culminating with the purchase of respected White, Weld & Company.
In 1977, Merrill’s Cash Management Account (CMA) was created, which revolutionized brokerage accounts to allow clients to write checks and make credit card charges. Yet, the firm’s earnings were volatile and by 1980, Regan exited to became Treasury Secretary under Ronald Reagan. During the 1980’s, Merrill Lynch’s revenue and assets under management grew steadily, but it was earnings lagged and it gained the reputation of being big but inefficient. During the 1990’s, it cut costs and shrank, but profits rose.
Today, Merrill Lynch & Co., Inc is indeed a “full service” brokerage firm to individuals, corporations, institutions and governmental clients. It has remained independent and diversified into almost every financial field. It is the largest U.S. retail investment firm by number of brokers, with over 15,000. It claims 60,000+ total employees in 37 companies, and over $1.6 trillion under management. Its earnings approach $10 billion, and its market capitalization is over $70 billion worldwide. Stanley O’Neal, who is black, it’s the firm’s CEO.
Our law firm represents institutional and individual investors nationwide with significant losses in their portfolios, retirement plans or investment accounts. Our attorneys and staff have more than 100 years of combined experience in the securities industry and in securities law. Several of our lawyers served for years as Vice President or Compliance Officer of brokerage firms.
Each lawyer and staff member of our firm is devoted to assisting investors recover losses caused by unsuitability, over-concentration, fraud, misrepresentation, self-dealing, unauthorized trades or other wrongful acts, whether intentional or negligent. We have handled over a thousand cases against hundreds of large and small investment firms, including against Merrill Lynch.
Call us at (800)259-9010 or contact us through our Website to arrange a free confidential consultation with an attorney to discuss your experiences with an investment advisor or financial firm which resulted in losses.
This may sound familiar, but the event in question occurred in 1966. The SEC charged Merrill Lynch with passing on confidential information about Douglass Aircraft, an investment banking client, to its institutional clients prior to a debt offering. The company neither admitted nor denied the allegations but agreed to pay fines. The following year Merrill earned a record $55 million. (History repeats itself.)
In 1986, less than a year before the largest one day drop in stock prices in history, scandal rocked Merrill Lynch when a 23-year-old Merrill Lynch broker was arrested by the FBI for mail fraud. His complex fraud scheme involved huge sums, including $10 million from a single investor’s account. The case drew international attention because it involved such a young, low level Merrill employee. A few months later, but before the October 1987 crash; Merrill lost $377 million trading mortgage-backed securities–the largest one-day, one-company trading loss in Wall Street history. The events left many wondered about management of the firm.
Although one of the richest neighborhood in the country, Orange County, California was forced into bankruptcy in 1994, after losing nearly $2 billion in mortgage backed securities. Merrill Lynch was at the center of the controversy as the largest seller of such securities to Orange County. For years, such investments had been made using public funds, including on margin. When the Federal Reserve raised rates, the portfolio collapsed. Merrill Lynch denied wrongdoing, but there issues as to why public funds were being invested in this manner. Merrill Lynch settled the civil claims
In less than a year in 2002, Enron Corporation went from a darling of Wall Street into bankruptcy, after it was learned that firm grossly misled investors as to its earnings. Investment firms, including Merrill Lynch expressed outrage over these activities of Enron and its executives.
Yet, in 2004, four former Merrill Lynch executives were found guilty of fraud and conspiracy to pass off a loan from Merrill as a sale of three power barges moored off the coast of Nigeria in late 1999. The transaction was used to distort Enron’s earnings. Merrill Lynch paid over $90 million in fines for failing to supervise these agents.
Since that time, Merrill Lynch and other firms have worked to distance themselves from the Enron scandal – and succeeded. For example, just as Merrill was to finally go to trial in a class action filed against it by Enron shareholders, an appellate court suddenly decided that, although Merrill Lynch may have assisted Enron defraud its shareholders, the Federal Securities Act did not allow Enron Shareholders to pursue the claims against Merrill. (Laws now prevent class action claims concerning securities to be filed under any other law and that law no longer allows claims for aiding and abetting fraud.) Thus, the Enron Shareholders have now been scammed by the legal system. The case is currently before the Supreme Court, but observers say it is not likely to be reinstated.
SOME ENRON SHAREHOLDERS MAY HAVE A WINDOW TO SUE MERRILL LYNCH AND OTHERS OUTSIDE THE CLASS ACTION ARENA.
With the SEC and National Association of Securities Dealers on the sidelines, N.Y. Attorney General Eliot Spitzer filed charges against Merrill Lynch and other major Wall Street firms for giving buy recommendations based on obtaining and keeping firms as investment banking clients of Merrill, rather than because of expected growth in the price of the firms’ shares – or even the firms’ survival.
The New York AG found that Merrill Lynch’s investment analysts, especially its Internet analyst, Henry Blodget, had given favorable coverage to failing corporations. Central to the case were internal e-mails in which Blodget was berating companies at the some time he was publicly recommending the purchase of their shares. Merrill Lynch paid a $100 million to settle with to the state of New York, and another $100 million to resolve claims by the NASD and SEC, latecomers to the investigation.
Arbitrators ordered Merrill Lynch & Company, to pay a female stockbroker more than $2 million in her claim that the firm discriminating against women stockbrokers. Dozens of similar claims were pending against the firm.
Merrill had already paid more than $100 million to settle with hundreds of other women who joined a class-action case against the firm. Similar claims have also been filed against other large brokerage firms.
The former female Merrill brokers contended that the firm favored men and paid them more than women long after many other white-collar industries ended such practices. “Merrill’s failure to train, counsel or discipline employees who engaged in sexual harassment constitutes discrimination with malice or reckless indifference to the federally protected rights of female employees,” the arbitrators wrote in their decision.
In June 2007, the U.S. Equal Employment Opportunity Commission also brought a suit against Merrill alleging unfair treatment of Muslim and Iranian employees.
Merrill Lynch broker Peter Bacanovic was tried along side Martha Stewart, was also found guilty and was sentenced to 5 months in prison, just as was Ms. Stewart. The case arose over charges that Bacanovic gave Stewart inside information about the sale of stock by another of his clients, the President of that company.
Bacanovic claimed that Stewart had placed an order with him to sell the shares if these fell below a certain level, called a “stop loss” order, well before the firm president sold his shares. There was evidence to the contrary and many, apparently including the jury, thought his and Martha Stewart’s stories lacked credibility. Neither testified in the case. Stewart was found guilty of lying to investigators about her role.
Most believe it was unlikely either would have been convicted of the original insider trading charges even if the shares were sold based on the information that an insider was selling. Thus, this may be another case when the cover-up was worse than the event.
Merrill Lynch & Co. agreed to pay $25 million in fines Wednesday for its alleged role in financing Sumitomo Corp. in a lengthy trading scheme that caused the copper markets to plummet when uncovered in 1996.
The Commodities Futures Trading Commission filed Merrill $15 million, which has only been eclipsed by that regulatory body’s $125 million fine against Sumitomo in the same scandal. The London Metal Exchange also fined Merrill $10, its largest fine ever. The fines were for helping a trader at Japanese based Sumitomo Corp. to hide losses for several years.
Merrill Lynch first said the claims against it were “without merit”, and later said it negotiated the settlements “to bring closure to” the regulatory proceedings and “to avoid the expense and distraction of protracted litigation.” However, the regulators claim that Merrill provided financing for trading that it knew to be bogus.
The Sumitomo trader, who lost a total of more than $2.6 billion in unauthorized trades, is now serving a prison term in Japan for fraud and forgery. The two fines against Merrill Lynch combined are reportedly about the amount of its profits dealing with the trader.
Merrill Lynch was fined $2.5 million for mishandling the delivery of internal emails during an SEC investigation and was ordered to cease-and-desist any further such actions.
The SEC said that Merrill Lynch did not produce e-mails requested by the agency “in a timely fashion” as required during an investigation which lasted more than a year. It also said Merrill’s policies and procedures for retaining and providing the SEC electronic documents were deficient.
Prosecutors arrested a 23 year old Merrill Lynch analyst accused of running a $6.7 million insider trading scheme. The low level employee in Merrill’s merger and acquisition division was arrested for giving secret information on about pending takeovers to others and his involvement in trading on shares prior to publication of articles in a business magazine. Also arrested was a printing plant employee.
The scheme, hatched in a Manhattan sauna, spanned the globe with foreign bank accounts being used to fund purchases of the shares and attempt to avoid detection.
NASD and SEC fined Merrill Lynch $14 million for suitability and supervisory violations relating primarily to sales of mutual funds, as part of regulators continuing investigation into mutual fund sales practices at many brokerage firms. The firm was also ordered to refund certain of the overcharges to at least 23,000 of its clients.
Many mutual funds charge sales commissions which are paid to firms for selling the funds. Front-end load funds, called “A-shares,” charge the loads when the funds are purchased, but usually offer discounts at “breakpoints” when higher amounts are purchased. Most offer the breakpoints on purchases made into a “family of funds,” to allow diversification. Funds managers also often allow time to meet breakpoints, usually a year, with “letters of intent” so investors can get the discounts on the earlier purchases.
These discounts lower the commissions paid to salespersons, so there is room for abuse. It is a rule violation to for brokers to work to avoid the discounts. The SEC and NASD each brought cases against firms which were allegedly allowing their representatives to violate the “break-point” rules.
As well, salespersons often use Class B or Class C mutual fund shares, which do not offer breakpoints, but can cost far more than Class A shares when breakpoints discounts could be used.
The U.S. Court of Appeals for the Second Circuit has affirmed a lower court’s ruling to dismiss the ARS lawsuit filed against Merrill Lynch (MER), Merrill Lynch, Pierce, Fenner, and Smith Inc. ( MLPF&S), Moody’s Investor Services (MCO), and the McGraw-Hill Companies, Inc. (MHP). Pursuant to state and federal law, plaintiff Anschutz Corp., which was left with $18.95 million of illiquid auction-rate securities when the market failed, had brought claims alleging market manipulation, negligent misrepresentation, and control person liability. The case is Anschutz Corp. v. Merrill Lynch & Co. Inc.
According to the court, Merrill Lynch underwrote a number of the Anchorage Finance ARS and Dutch Harbor ARS offerings in which Anschutz Corp. invested. To keep auction failures from happening, Merrill was also involved as a seller and buyer in the ARS auctions and had its own account. Placing these support bids in both ARS auctions allowed Merrill to make sure that they would clear regardless of the orders placed by others. The financial firm is said to have been aware that the ARS demand was not enough to “feed the auctions” unless it too made bids and that its clients did not know of the full extent of these practices.
Per its securities complaint, Anschutz contends that the description of Merrill’s ARS practices, which were published on the financial firm’s website beginning in 2006, were misleading, untrue, and “inadequate.” The plaintiff accused the credit rating agency defendants of giving the ARS offerings ratings that also were misleading and false and should have been lowered (at the latest) in early 2007 when Merrill knew or should have known that the ratings they did receive were unwarranted.
Last year, the United States District Court for the Southern District of New York dismissed the ARS lawsuit, concluding that Merrill’s disclosures on its Web site had been “sufficient” to make Anschutz aware of Merrill’s ARS “support bidding practices.” In regards to the claims against the credit rating agency, the court found that the plaintiff did not succeed in alleging that there was any actionable misstatement under California or New York law because the challenged ratings were only “statements of opinion.”
Now, in affirming the district court’s decision to dismiss the ARS lawsuit, the appeals court has found that the “generalized and conclusory allegations” made by the plaintiff are not enough to plead that a violation of securities law occurred. The 2nd Circuit also affirmed the district court’s decision to dismiss the California statutory claims against Merrill on the basis that Anschutz did not allege that the harm it suffered occurred in that state or that the financial firm committed any behavior there that was relevant.
As for the claims against the credit ratings agency, the appeals court held that the plaintiff did not have any alleged contact or relationship with the defendants that would “remotely” meet the standard under New York law, which mandates that to make a negligent misrepresentation claim a plaintiff has to allege that because of “a special relationship” it was the defendant’s duty to provide the correct information.
If your losses are a result of a failed ARS and you believe that misconduct or negligence on the part of a financial firm or one of its advisers was a factor, please contact one of our auction-rate securities lawyers today.
More Blog Posts:
Raymond James Settles Auction-Rate Securities Case with Indiana Securities Division for $31M, Stockbroker Fraud Blog, August 27, 2011
The 11th Circuit Revives SEC Fraud Lawsuit Against Morgan Keegan Over Auction-Rate Securities, Institutional Investor Securities Blog, May 8, 2012
Securities Fraud Lawsuit Against UBS Securities LLC by Detroit Pension Funds Won’t Be Remanded to State Court, Says District Court, Institutional Investor Securities Blog, January 17, 2011