Merrill Fined in Fund Timing

It will pay $13 million for failing to supervise brokers.
By TSC Staff ,

Merrill Lynch

(MER)

brokers were so intent on keeping the market-timing business of a big New York hedge fund that after being told to stop placing its trades, they set up accounts outside the brokerage and continued to facilitate the fund's shady strategies.

Merrill agreed to pay $13 million Tuesday to settle allegations it should have stopped the abuses, which center on an ethically questionable mutual fund arbitrage that has been at the center of a two-year-old Wall Street scandal. The brokerage neither admitted nor denied guilt in settling the case, which was brought by the New Jersey attorney general and the

New York Stock Exchange

.

Prosecutors identified the hedge fund as Millennium Partners, the Manhattan investment company run by storied money-manager and onetime John Mulheren crony Israel Englander. The fund's involvement in the mutual fund market-timing probe has been

chronicled extensively on this Web site.

Millennium, which has managed more than $3 billion in client assets in the past, sent more than 3,700 market-timing trades to the Merrill group between January and April 2002, the complaint alleges. After getting complaints from the mutual funds whose shares were being traded, Merrill executives forbade the practice.

The brokers responded by opening and administering accounts for Millennium at the mutual funds themselves.

"With the consultation of Merrill Lynch managers, the brokers facilitated the opening of accounts for the hedge fund client at various mutual funds and then moved mutual fund positions held at Merrill Lynch to the accounts held outside the firm," the complaint states. "The brokers placed themselves as 'Broker of Record' on the outside accounts and continued to execute frequent trades on the hedge fund's behalf in the accounts held at those funds."

It wasn't until November 2002 that Merrill managers again heard about the ruse from the mutual funds and told the brokers to stop facilitating the trades. Still, the brokers didn't comply and kept making trades for Millennium until "at least" April 2003, the complaint said.

Market-timing is a strategy of rapid-fire mutual fund trading designed to profit from small price discrepancies in different markets. While legal, it is usually prohibited or discouraged in most mutual fund prospectuses.

The same brokers also helped Millennium buy a multimillion dollar variable annuity and other insurance policies and helped it market-time the investments underlying them. Millennium's colorful involvement with this kind of arbitrage was chronicled by

TheStreet.com

here.

A NYSE hearing panel found that Merrill failed to adequately supervise the trading of mutual funds, failed to review and maintain communications with the public and failed to make and/or preserve accurate books and records relating to variable annuity transactions.

Steve Markovitz, a former top trader at Millennium, pleaded guilty early on in the scandal to making illegal late trades in shares of mutual funds. Markovitz, who has yet to be sentenced, is still cooperating with New York Attorney General Eliot Spitzer, whose office continues to look into allegations of illegal afterhours mutual fund trading.

Loading ...