South Florida Arbitration & Litigation Lawyer Blog
December, 2011:
FINRA Fined Merrill Lynch $1 Million for Supervisory Failures That Allowed a Registered Representative to Operate a Ponzi Scheme. The moral to this story is that as an investor, it is important for you to be diligent in all of your dealings with a brokerage firm and its employees no matter how large or small the firm is or how well you thing that you know the account executive.
Recently, the Financial Industry Regulatory Authority (FINRA) announced that it has fined Merrill Lynch, Pierce, Fenner & Smith Inc., $1 million for supervisory failures that allowed a registered representative at Merrill Lynch’s branch office in San Antonio, Texas, to use a Merrill Lynch account to operate a Ponzi scheme.
Bruce Hammonds, the registered representative, 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. However, if the employee’s social security number was not the primary number associated with the account, the 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, “Firms must ensure their supervisory systems are designed to properly monitor employee accounts for potential misconduct. 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.”
In concluding this settlement, Merrill Lynch neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.