Merrill Fined $1M for Failing to Supervise Santo Office

The Financial Industry Regulatory Authority (FINRA) has just announced its action against Merrill Lynch, Pierce, Fenner & Smith Incorporated on October 4, 2011. The regulatory authority has slapped Merrill with a $1 million fine for the failure to supervise, because of brokers in the San Antonio office were allowed to use a Merrill Lynch account to run a Ponzi scheme. Merrill Lynch has reimbursed all of the investors involved in the scam.

According to the release, Bruce Hammonds in the San Antonio office opened a business account for B&J Partnership out of which the Ponzi scheme was run. The account was approved by supervisory personnel and operated for more than 10 months. There was over $1 million deposited into the account by some 11 or so individuals and withdrawn by Hammonds. Accordingly, FINRA determined that Merrill Lynch had failed to have an adequate supervisory system in effect to monitor employee accounts. Their investigation revealed a considerable lapse, which was the fact that the supervisory system would only catch an account opened with the employee's social security number being the primary identification number. If the employee's social security number was not the primary identification number, the account would slip through the system and not be monitored. The result was that in over four years there were some 40,000 employee or employee interested accounts that went unmonitored by the Merrill Lynch supervisory system. This was found to be unacceptable by FINRA as it opened the doors for broker misconduct.

According to FINRA's Executive Vice president and Chief of Enforcement, Brad Bennett, "Firms must ensure their supervisory systems are designed to properly monitor employee accounts for potential misconduct. Merrill Lynch's inadequate supervisory system and the firm's excessive reliance on employee self-reporting enabled Hammonds to facilitate his Ponzi scheme to the detriment of investors."

Bruce Hammonds' BrokerCheck Report indicates that he began working for Merrill Lynch in September 2005 and he was terminated in June 2008 for the misappropriation of funds from clients, among other things. In October 2009, Hammonds was sentenced to 57 months in federal prison, followed by 3 years of supervised release, in addition to being ordered to pay $1,111,323.43 in restitution. In December 2009, FINRA barred him permanently from the securities industry in any capacity. Accordingly, he is not associated with any FINRA firm per the report.

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