Probe Talk Pounds Merrill

Merrill Lynch (MER) plunged 9% to a 52-week low after The Wall Street Journal reported the brokerage firm could face regulatory scrutiny of its asset-valuation practices.

The Journal reported that the firm has drawn the eye of the Securities and Exchange Commission with a reported deal to sell $1 billion in troubled mortgage-related securities to a hedge fund. That kind of transaction wouldn't normally concern regulators -- except that Merrill has agreed to potentially buy the securities back in a year at a set price, the Journal reported.

That kind of transaction, if true, could concern regulators because it would involve no actual risk to the hedge fund and could have the effect of making Merrill's books look better by relieving the firm of the need to write down the value of the securities involved. Mortgage securities have plunged this year as defaults spiked on billions of dollars in home loans made to borrowers with bad credit histories.

The news comes just days after the firm ousted CEO Stan O'Neal following last week's $8 billion writedown of mortgage securities and collateralized debt obligations. Wall Street analysts say the firm may face more writedowns ahead. Similar concerns have weighed in recent days on Citi (C), Bear Stearns (BSC) and other financial names, and the entire bank and brokerage sector was in the red again Friday after a sharp decline Thursday.

Merrill fell $5.36 to $56.83.