Merrill Lynch & Co. Inc. has paid a $50,000 fine and $175,253 in restitution to settle charges that a former broker in Baltimore inappropriately invested clients' money in a company that the New York brokerage helped to take public, the Maryland Securities Division said yesterday.
The agency said the brokerage firm had agreed in a consent order to also improve the supervision and training of its employees in the Baltimore office.
The division had alleged that Merrill Lynch failed to file disclosure reports about some customer complaints between 1991 and 1996.
"Brokerage firms are required to maintain a level of supervision that protects their customers from practices that may negatively affect their investments," said Attorney General J. Joseph Curran Jr., whose office includes the Maryland Securities Division.
Bill Halldin, a Merrill Lynch spokesman, said the company had increased the supervision of its brokers before the securities division began investigating.
"Merrill Lynch's internal controls detected inappropriate activity in certain client accounts," he said. "The firm terminated the employees involved. In addition, in 1997, the firm took steps to compensate clients who were affected. We have enhanced our procedures and tightened our controls in order to prevent this kind of activity in the future."
Addressing the absence of disclosure reports, Halldin said the company "inadvertently" failed to file "less than a handful" of reports.
In the consent order, the securities division said Merrill Lynch failed to reasonably supervise certain agents in Baltimore in violation of state securities laws. The company neither admits nor denies the allegations, according to the consent order.
According to the order, the agency investigation found that in 1996, a broker-dealer, Jeffrey L. Farley, recommended that Merrill Lynch customers purchase the common stock of Mossimo Inc., an apparel company newly listed on the New York Stock Exchange for which Merrill Lynch was a co-underwriter.
The broker's actions were inappropriate because some customers were sold too many shares in comparison with the rest of their holdings, or because the shares did not fit the investment objectives of clients, according to the consent order. The investigation also revealed excessive trading in customers' accounts by Farley and another broker, Milliet K. Lanham, according to the order. Excessive trading can generate broker commissions and fail to be in the best interest of an investor.
Merrill Lynch fired Farley in January 1997 and Lanham in January 1996, Halldin said. The firm also made adjustments in the accounts of some holders of Mossimo shares and reached settlements with customers whose accounts were traded excessively, according to the consent order.
Yesterday's consent order had called for the payment of the $50,000 fine to the attorney general's office. In addition, the office will distribute the $175,253 payment to about 40 Mossimo investors based on the commissions they paid, said Securities Commissioner Melanie Senter Lubin.
The order also calls for Merrill Lynch to continue holding training sessions twice a year for management and financial consultants in the Baltimore office; for the Baltimore office to provide the division with copies of customer complaints about sales practices within 30 days of receipt for the next two years, and for necessary and appropriate personnel to supervise Merrill Lynch's Baltimore employees.