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SEC Readies Enforcement Case Against Merrill Lynch Over Structure Notes

SEC Readies Enforcement Case Against Merrill Lynch Over Structure Notes

The Securities and Exchange Commission (SEC) is preparing a civil enforcement case against Merrill Lynch over investments that lost as much as 95% in value and was marketed in a way that one of the firm’s financial advisers called “borderline crooked.”

The expected case against the brokerage arm of Bank of America (BOA) focuses on the risks of so-called structured notes which are securities custom-built by banks and brokerages out of options as well as other derivatives and then packaged and sold to retail investors.

It also brings to light a dispute between Merrill and two of its brokers who sold structured notes to their clients. With clients complaining after the value of the notes plunged, the brokers secretly taped calls with executives at Merrill, left the firm for rival Union Bank of Switzerland (UBS) and then filed a SEC  whistleblower complaint over the notes.

The probe involves a product called Strategic Return Notes that Merrill sold over a number of months in 2010, raising about $150 million. The notes were linked to a Merrill Lynch tracking index related to the volatility of the S&P 500.  The notes, with a five-year maturity, lost value rapidly after they were issued, as market volatility fell and the cost of buying the options upon which the notes were based spiked upward in price.

Those so-called roll costs averaged about 12% of the principal per quarter in the first half of 2011, before falling to an average of less than 4% per quarter in the second half of the year, according to a Merrill Lynch spokesperson. During sales calls, the brokers allege they were never told the costs could grow so large and the marketing was “borderline crooked.”  The advisers were  also told on the calls not to suggest to their clients the product was flawed.  The two former Merrill Lynch brokers turned whistleblowers are  Glen Ringwall and colleague Mark Manion.

The advisers recorded the calls in August 2011, when they were facing potential complaints from investors in the notes, which had lost more than half their value. The two brokers moved to UBS in July 2012 and submitted a whistleblower complaint to the SEC the following September alleging defects in the Merrill notes. The advisers can claim a reward if their tip leads the SEC to bring a case against Merrill and impose sanctions of more than $1 million.

The $10 notes that matured in November had a redemption value from Merrill Lynch of only 50 cents. The bank said most investors sold the notes in the first year.

Banks sell $40 billion to $50 billion of structured notes each year. They rank among the most common types of securities in arbitration claims filed with the Financial Industry Regulatory Authority (FINRA).  An SEC official, said in a speech last year that she wonders “how many brokers and advisers who sell these products to retail investors actually understand what they are selling.”

A number of investors have already filed FINRA arbitration claims looking to recover losses related to the flawed structured notes. The investors say they aren’t complaining about the conduct of brokers Ringwall and Manion, who sold them the notes. A handful of claims filed by other investors against Merrill and the two advisers in relation to the notes have already been settled, according to a regulatory database. In comments in the records, the brokers each denied any wrongdoing or liability.

At Colling Gilbert Wright, our stock market attorneys at have decades of combined experience helping victims of dishonest stock brokers get justice. If you would like a free consultation on your case, please contact us online or by calling (407) 712-7300 today. Our FINRA attorneys represent victims of fraud throughout the United States from our Florida location.