MERRILL LYNCH TO PAY CFTC FINE FOR SUPERVISORY FAILURES

FROM:  COMMODITY FUTURES TRADING COMMISSION 

CFTC Orders Merrill Lynch to Pay $1.2 Million Fine for Supervision Failures

Firm’s Supervisory Failures over Fee Processing Led to Client Overcharges at Times

Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch) for failing to diligently supervise its officers’, employees’, and agents’ processing of futures exchange and clearing fees charged to its customers from at least January 1, 2010 through April 2013. Merrill Lynch is a CFTC-registered Futures Commission Merchant and approved swap firm located in New York, New York.

The CFTC Order finds that Merrill Lynch’s fee reconciliation process for identifying and correcting discrepancies between the invoices from the exchange clearinghouses and the amounts charged its customers had been faulty for more than two years. As a result, Merrill over-accrued fees from some clients and under-accrued fees from others. These fee reconciliations show that Merrill paid more than $318 million in exchange and clearing fees to the CME and Chicago Board of Trade during that time, but had unexplained over-accruals of approximately $451,318 (0.14% of fees paid) from 196 clients, according to the Order.

Additionally, the CFTC Order finds that Merrill Lynch did not hire qualified personnel to conduct and oversee its fee reconciliations and did not provide any completed procedures manuals regarding fee reconciliations to its staff until at least April 2013. The Order also finds that procedures Merrill Lynch did have up until that time were viewed as ”not fit for purpose” because they were “fundamentally flawed.” Merrill Lynch also did not provide any meaningful training to employees regarding how to conduct fee reconciliations until 2013, the Order finds.

The CFTC Order requires Merrill Lynch to pay a $1.2 million civil monetary penalty and cease and desist from violating CFTC Regulation 166.3 governing diligent supervision. The Order also requires Merrill Lynch to comply with undertakings that include, hiring an outside consulting firm to assist in training staff and reviewing and updating its current procedures regarding exchange and clearing fee reconciliations.

The CFTC Division of Enforcement staff members responsible for this case are Susan Gradman, Joseph Patrick, Brigitte Weyls, Scott Williamson, Rosemary Hollinger, and Richard Wagner.

SEC CHARGES ACCOUNTING FIRM PARTNER FOR INSIDER TRADING BASED ON CONFIDENTIAL INFORMATION

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced charges against an accounting firm partner in Atlanta for insider trading in the stock of a restaurant company based on confidential information he learned from a client on the board of directors who came to him for tax advice in advance of a tender offer announcement.

SEC investigators also identified and charged three other traders who traded illegally on tips from the accountant.  The traders were discovered by comparing trading records from stock exchanges with names on the accountant’s client list.

The SEC alleges that Donald S. Toth disregarded his fiduciary duty to a client when he illicitly purchased stock in O’Charley’s Inc. – which operates or franchises restaurants under the brands O’Charley’s, Ninety Nine Restaurant, and Stoney River Legendary Steaks – after the client revealed to him in a tax-planning meeting that Fidelity National Financial was planning to purchase the company.  Toth contacted his financial advisor within the hour after this meeting with the O’Charley’s board member and began making plans to purchase 5,000 shares of O’Charley’s stock.  Toth also tipped two other clients, James A. Nash and Blair G. Schlossberg.  Nash purchased 10,000 shares and tipped others who separately traded.  Schlossberg tipped his business partner Moshe Manoah and they jointly invested in O’Charley’s stock using a brokerage account held in the name of Manoah’s wife. 

According to the SEC’s complaints filed against Toth, Nash, Schlossberg, and Manoah, when the tender offer was publicly announced approximately two months later, the price of O’Charley’s stock closed 42 percent higher than the previous trading day.  The insider trading activity garnered illegal profits of more than $160,000. 

The four have agreed to pay a combined total of more than $420,000 to settle the SEC’s charges.

“As an accountant, Toth had a duty to keep confidential the information shared by his client for tax-planning purposes, but instead he misused it for personal investments and provided the details to other clients for their misuse,” said William P. Hicks, associate director of enforcement in the SEC’s Atlanta Regional Office. 

The SEC’s complaints were filed against Toth and Nash yesterday in federal court in Atlanta and against Schlossberg and Manoah today in federal court in Tampa, Fla.  They are charged with violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3.  Without admitting or denying the allegations, they consented to the entry of judgments permanently enjoining them from violating these provisions of the securities laws.  The settlements are subject to court approval.

Toth, who lives in Atlanta, agreed to pay disgorgement of $19,036.00 in trading profits plus prejudgment interest of $1,224.09 and a penalty of $103,935.50 for a total of $124,195.59.

Nash, who lives in Buford, Ga., agreed to pay disgorgement of $52,500.00 – which represents his own trading profits and those of others who he tipped – plus prejudgment interest of $3,375.96 and a penalty of $52,500.00 for a total of $108.375.96.

Schlossberg, who lives in Holmes Beach, Fla., agreed to pay disgorgement of $46,358.50 in trading profits plus prejudgment interest of $2,981.02 and a penalty of $46,358.50 for a total of $95,698.02.

Manoah, who lives in Davie, Fla., agreed to pay disgorgement of $46,358.50 in trading profits plus prejudgment interest of $2,981.02 and a penalty of $46,358.50 for a total of $95,698.02.

The SEC’s investigation was conducted by Elizabeth P. Skola with assistance from Aaron W. Lipson and Robert Schroeder in the Atlanta Regional Office.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

Statement at Open Meeting regarding Proposed Amendments to Regulation D, Form D and Rule 156 under the Securities Act

Statement at Open Meeting regarding Proposed Amendments to Regulation D, Form D and Rule 156 under the Securities Act

The Case for User Fees

The Case for User Fees

SEC ANNOUNCES $16.65 BILLION SETTLEMENT WITH BANK OF AMERICA

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced a settlement in which Bank of America admits that it failed to inform investors during the financial crisis about known uncertainties to future income from its exposure to repurchase claims on mortgage loans.

Bank of America also is resolving securities fraud charges that the SEC filed last year related to a residential mortgage-backed securities (RMBS) offering.

Bank of America has agreed to settle the two cases by paying $245 million as part of a major global settlement announced today by the U.S. Department of Justice in which Bank of America will pay $16.65 billion to resolve various investigations involving violations of laws regulated by other federal agencies.

“Bank of America failed to make accurate and complete disclosure to investors and its illegal conduct kept investors in the dark,” said Rhea Kemble Dignam, regional director of the SEC’s Atlanta office.  “Requiring an admission of wrongdoing as part of Bank of America’s agreement to resolve the SEC charges filed today provides an additional level of accountability for its violation of the federal securities laws.”

In new charges filed by the SEC today in a settled administrative proceeding, Bank of America admits that it failed to disclose known uncertainties regarding potential increased costs related to mortgage loan repurchase claims stemming from more than $2 trillion in residential mortgage sales from 2004 through the first half of 2008 by the bank and certain companies it acquired.  In connection with these sales, Bank of America made contractual representations and warranties about the underlying quality of the mortgage loans and underwriting.  In the event that a loan buyer claimed a breach of a representation or warranty, the bank could be obligated to repurchase the related mortgage loan at its outstanding unpaid principal balance. 

According to the SEC’s order, Regulation S-K requires public companies like Bank of America to disclose in the Management’s Discussion & Analysis (MD&A) section of its periodic financial reports any known uncertainties that it reasonably expects will have a material impact on income from continuing operations.  Bank of America failed to adhere to these requirements by not disclosing known uncertainties about the future costs of mortgage repurchase claims when filing its financial reports for the second and third quarters of 2009.  These uncertainties included whether Fannie Mae, a mortgage loan purchaser from Bank of America, had changed its repurchase claim practices after being put into conservatorship, the future volume of repurchase claims from Fannie Mae and certain monoline insurance companies that provided credit enhancements on certain mortgage loan sales, and the ultimate resolution of certain claims that Bank of America had reviewed and refused to repurchase but had not been rescinded by the claimants.

In the SEC’s original case against Bank of America filed in August 2013, the agency alleged that the bank in its own words “shifted the risk” for losses to investors when it failed to disclose that more than 70 percent of the mortgages backing the RMBS offering called BOAMS 2008-A originated through its “wholesale” channel of mortgage brokers unaffiliated with Bank of America entities.  Bank of America knew that such wholesale channel loans – described internally as “toxic waste” – presented vastly greater risks of severe delinquencies, early defaults, underwriting defects, and prepayment.

As part of the global settlement, Bank of America agreed to resolve the SEC’s original case by paying disgorgement of $109.22 million, prejudgment interest of $6.62 million, and a penalty of $109.22 million while consenting to permanent injunctions against violations of Sections 5, 17(a)(2), and 17(a)(3) of the Securities Act of 1933.  The settlement is subject to court approval.  To settle the new case, Bank of America agreed to pay a $20 million penalty while admitting to facts set out in the SEC’s order, which requires Bank of America to cease and desist from causing any violations and any future violations of Section 13(a) of the Securities Exchange Act of 1934 and Rules 12b-20 and 13a-13. 

The SEC’s investigation into Bank of America’s MD&A-related violations was led by Mark A. Troszak, Kristin B. Wilhelm, and Peter J. Diskin in the SEC’s Atlanta office.  The investigation into Bank of America’s RMBS-related violations was led by Mark Eric Harrison and Aaron W. Lipson, and the litigation was led by Ms. Wilhelm with assistance from Mr. Harrison.  The investigations were supervised by Ms. Dignam and William P. Hicks, associate regional director for enforcement in the Atlanta office.  The SEC appreciates the assistance of the Justice Department and the U.S. Attorney’s Office for the Western District of North Carolina.

Beginning to Shine a Light on the Opaque Derivatives Market: Defining Dealers and Major Participants in the Cross-Border Context

Beginning to Shine a Light on the Opaque Derivatives Market: Defining Dealers and Major Participants in the Cross-Border Context