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Banking Major Pays $42M For Misleading Customers

SEC

If it sounds familiar, that’s because it is: Bank of America Corp’s Merrill Lynch has agreed to pay a $42-million fine levied by the SEC after admitting to having misled its brokerage customers about what firms were actually handling their trades.

That was on Tuesday, and with the U.S. Securities and Exchange Commission.

In March, the same fine was levied on the bank by the New York attorney general for the same case.

Not only was Bank of America purposefully misleading its customers, but it had been doing it for five years, according to New York Attorney General Eric Schneiderman.

At that time, the bank has admitted that is misleading of clients was systematic, and that it had concealed agreements with five outside companies to handle trades. It’s a scheme the SEC refers to as “masking”.

The SEC enforcement co-director, Stephanie Avakian, said in a statement that Merrill had fallen “far short of the standards expected of broker-dealers in our markets”.

This is how the masking worked, over a period of five years:

The bank seeks to make its trading services look more impressive and sophisticated than they are, in reality, so they close side deals with trading houses that end up taking their clients’ money outside of the bank. The clients are none the wiser in this masking scheme, which goes down in the bank’s “dark pool”.

Dark pools are off-exchange trading venues where bigger investors can buy and sell large amounts without tipping off the market.

Throughout, the bank said its retail investors could handle up to 30 percent of trades. The SEC said Merrill falsely told customers that more than 15.8 million orders worth over $141 billion had occurred in-house.

At the end of the day, they could only handle around 5 percent. And they didn’t just fail to let clients know this, they systematically reprogrammed their trading system to ensure that confirmation messages sent directly from the bank to clients even though outside providers were executing the orders. Related: Pot Stocks Soar As Canada Legalizes Cannabis

"Bank of America Merrill Lynch went to astonishing lengths to defraud its own institutional clients about who was seeing and filling their orders, who was trading in its dark pool, and the capabilities of its electronic trading services," the attorney general said in a statement after the March fine.

“By misleading customers about where their trades were executed, Merrill Lynch deprived them of the ability to make informed decisions regarding their orders and broker-dealer relationships,” said the SEC’s Avakian. “Merrill Lynch, which admitted that it took steps to ensure that customers did not learn about this misconduct, fell far short of the standards expected of broker-dealers in our markets.”

BOA stock dipped on the SEC statement Tuesday, but then pared losses somewhat.

Though the BoA Merrill fines dwarf others, Deutsche Bank was also fined for misleading customers in February this year. In this case, the SEC ordered the bank to pay customers $3.7 million, plus a $750,000 penalty for misleading sales and failing to have compliance and surveillance procedures in place to prevent misconduct. 

By Tom Kool for Safehaven.com

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