Merrill Lynch Charged by SEC with Misusing Customer Order Information and Charging Undisclosed Trading Fees

In a press release on January 25, 2011, the U.S. Securities and Exchange Commission (SEC) announced it had charged Merrill Lynch, Pierce, Fenner & Smith, Inc. with securities fraud for misusing customer order information to place proprietary trades for the firm and for charging customers undisclosed trading fees. Merrill Lynch reached an agreement with the SEC to settle the matter for $10 million and consent to a cease-and-desist order.

Scott W. Friestad, Associate Director in the SEC’s Division of Enforcement said that “investors have the right to expect that their brokers won’t misuse their order information” and that “the conduct here was clearly inappropriate.” According to the SEC allegations, Merrill had a proprietary trading desk between 2003 and 2005 known as the Equity Trading Desk (ESD) that traded securities only for the firm’s benefit. Apparently the ESD traders obtained information on institutional orders then used it to place trades on Merrill’s behalf. Furthermore, Merrill allegedly charged customers undisclosed mark-ups and mark-downs by filling orders at less favorable prices than what Merrill paid or received. “There is no place in our markets for charging investors undisclosed trading fees”, said Robert B. Kaplan, Co-Chief of the SEC’s Asset Management Unit.

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