On August 31, 2012, InvestmentNews reported that Merrill Lynch has agreed to pay a $400,000 fine to settle a Financial Industry Regulatory Authority (“FINRA”) regulatory proceeding. FINRA regulators had accused Merrill Lynch of churning customers’ accounts by making excessive, short-term trades of mutual funds and unit trusts. As part of the settlement, Merrill Lynch also will pay $139,718 in restitution to customers who were victims of the stockbroker negligence and investment fraud.
FINRA claimed that Merrill Lynch failed to supervise former broker David Bredenburg, who worked in Merrill Lynch’s Towson, Maryland office. Mr. Bredenburg is alleged to have made at least 37 unsuitable short-term trades in unit trusts and closed-end funds from Oct. 2006 through February 2009, and used excessive margin in doing so. FINRA claims that Merrill Lynch failed to properly supervise its broker. According to FINRA, Merrill Lynch did not take actions to stop the broker’s alleged unsuitable trades until customers began to complain in April 2008.
Merrill Lynch ultimately fired Mr. Bredenburg in February 2009 for unauthorized trading, and Maryland and FINRA regulators have barred Mr. Bredenburg from the securities industry in March 2009 and July 2010, respectively.
We are pleased to see that regulators have held Merrill Lynch accountable for Merrill Lynch’s faulty supervision over a rogue broker. But it is disappointed to see that Merrill Lynch allowed this conduct to take place at all and that Merrill Lynch failed to take any disciplinary action until after customers complained. It appears that Merrill Lynch was happy to pocket the allegedly excessive commissions and fees generated by the excessive trading so long as no customer recognized the misconduct.
