Merrill Lynch & Co. was fined $13.5 million by the states of New Jersey and Connecticut and the New York Stock Exchange, after a group of the company’s brokers engaged in improper market-timing of mutual funds, regulators announced Tuesday.
The NYSE said it determined that a group of brokers in Fort Lee, N.J., made more than 3,700 short-term mutual fund transactions from January through April 2002. The brokers used multiple accounts, all of which were held for a single hedge fund client, the NYSE said, and the accounts were transferred outside the firm and back in later that year.
According to a statement from the New Jersey attorney general’s office, Millennium Partners L.P. was the hedge fund involved in the incidents.
The transfers and other violations continued through October 2003, with the traders involved hiding their transactions from Merrill Lynch, the exchange said. While Merrill Lynch told the brokers to stop the trades in November 2002, but the brokers did not, and Merrill Lynch failed to follow up, the NYSE said.
“When a firm discovers that brokers have engaged in misconduct, the exchange expects and demands that the firm will heighten supervision and take all necessary action to ensure that the conduct has ceased,” said Susan Merrill, chief of regulatory enforcement at the NYSE.
The NYSE decision coincided with an investigation led by New Jersey’s attorney general and supported by Connecticut and NYSE regulators.
Market timing is a practice in which shares of mutual funds are bought and sold quickly and ultimately skim profits from the fund at the expense of the long-term investors the funds were designed to serve. Brokers can use the fund’s listing of holdings to determine whether the funds will take losses on a given day, then sell the fund before the markets close and the value of each share is recomputed at the end of the session.
According to the NYSE, $10 million of the fine will be paid to the state of New Jersey as part of its settlement, and another $3.5 million to the state of Connecticut as part of settlement talks there.
In addition to the fine, the NYSE censured Merrill Lynch and required the brokerage review its procedures regarding the creation and retention of documents with regard to outside accounts.
Merrill Lynch agreed to the fine and censure without admitting or denying guilt. In a statement, the company said three brokers had been fired for misleading the firm and concealing their activities after they were told to stop, and sanctioned three of their supervisors.
“While this was an isolated incident, we take it very seriously and are determined to enforce our policies against market timing of mutual funds,” the company statement said. A spokesman for the company had no further comment.
A call to Millennium Partners seeking comment was not immediately returned.
Several major mutual fund companies — including Alliance Capital Management, Janus Capital Group and Bank of America Corp. — paid hundreds of millions of dollars in 2003 and 2004 to settle improper trading charges brought by regulators. Fund executives, managers and traders have also been accused of wrongdoing.