On October 4, 2011, the Financial Industry Regulatory Authority (FINRA) announced that it has fined brokerage firm Merrill Lynch, Pierce, Fenner & Smith Inc., $1 million for supervisory failures that allowed a broker at Merrill Lynch’s branch office in San Antonio, Texas, to use a Merrill Lynch account to operate a Ponzi scheme. Stockbroker negligence of this nature can cause enormous harm to investors.
Bruce Hammonds, the broker, convinced 11 individuals to invest more than $1 million in a Ponzi scheme he created and ran as B&J Partnership for over 10 months. Merrill Lynch supervisors approved Hammonds’ request to open a business account for B&J and failed to supervise funds that customers deposited and Hammonds withdrew. FINRA permanently barred Hammonds from the securities industry in December 2009. Merrill Lynch reimbursed all investors who were harmed by Hammond’s misconduct.
FINRA found that Merrill Lynch failed to have an adequate supervisory system in place to monitor employee accounts for potential misconduct. Merrill Lynch’s supervisory system automatically captured accounts an employee opened using a social security number as the primary tax identification number. But if the employee’s social security number was not the primary number associated with the account, Merrill Lynch’s system failed to capture the account in its database. Instead, Merrill Lynch solely relied on its employees to manually input these accounts into its supervisory system. FINRA also found that from January 2006 to June 2010, Merrill Lynch failed to monitor an additional 40,000 employee/employee-interested accounts, which were not reported for certain periods of time and therefore not available on the supervisory system.
Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said that “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.”