Merrill Lynch unit will pay $15.7M to settle a U.S. regulator’s allegations that it failed to properly supervise traders who persuaded clients to overpay for mortgage bonds by misleading them about how much the firm paid for the securities.
Merrill agreed to pay a fine of about $5.2M, and to pay disgorgement and interest of more than $10.5M, the SEC said in a statement.
Salespeople at the firm illegally profited from improper markups on residential mortgage backed securities that were in some cases twice as much as what customers should have paid, the SEC said.
“Lying to customers about the acquisition price can deprive investors of important information,” said Daniel Michael, head 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.”
Cracking down on bank traders who mislead clients about opaque markets for mortgage bonds has been a priority for the SEC and Justice Department in recent years. But the government has faced several setbacks.
A federal appeals in May court threw out the conviction of former Jefferies & Co. managing director Jesse Litvak.
The same day as the Litvak ruling, a jury acquitted former Cantor Fitzgerald LP trader David Demos of five counts of securities fraud.
In settling the SEC case, Merrill didn’t admit or deny the agency’s allegations. Paul Mishkin, an attorney for Merrill at Davis Polk & Wardwell, didn’t immediately respond to a phone call and email seeking comment.