The Wall Street fund management scandal widened Friday as Merrill Lynch sacked three brokers for violating a company policy prohibiting rapid-fire trading of mutual-fund shares.
A PERSON familiar with the situation said the three Merrill brokers helped Millennium Partners, a New York hedge fund, engage in the practice known as “market timing.”
The dismissals came a day after Steve Markovitz, a former Millennium trader, pleaded guilty to securities fraud charges involving “late trading” of mutual fund shares, a different practice that also has come under fire from regulators.
Unlike late trading, market timing is not illegal. However, it has been banned at Merrill Lynch since 1999, and most fund management companies discourage it because it can cost other investors some of their share of potential profits.
The person familiar with the situation said Merrill had not entered into an agreement with Millennium to allow market timing of mutual fund shares.
The funds whose shares were traded also had not given consent, the person said. Some of the funds involved were Merrill’s, but most were offered by other companies.
The three brokers worked as a group in New Jersey and joined Merrill in January 2002 from PaineWebber, the brokerage arm of UBS, the person familiar with the situation said.
Merrill received complaints from mutual fund companies last year about the activity. It investigated and told the brokers to stop. A resumption of complaints this year led Merrill to fire the three brokers. Merrill also notified the Securities and Exchange Commission and the New York attorney-general.
Meanwhile, the Investment Company Institute, the mutual fund industry body, has set up two task forces to look into the late trading and market timing of mutual fund shares.
The ICI said on Friday it had directed the task forces to “forcefully and effectively” address the two issues, and to work with regulators to implement their action plan to prevent such trading.
Paul Haaga, the ICI chairman, said: “The board (of ICI) is committed to ensuring that mutual fund shareholders always come first. Everything is on the table to protect mutual fund sharheolders.”
The task forces would require funds to have written policies aimed at preventing short-term trading in their shares, pursue measures to prevent traders from circumventing them, and improve disclosure of what their measures were.
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