BofA to pay for Merrill's bad disclosures
December 14, 2013, 12:02 am TWN
NEW YORK--Bank of America agreed to pay US$131.8 million for Merrill Lynch misleading investors about mortgage-linked securities in 2006 and 2007, the federal regulators announced Thursday.
The charges announced by the Securities and Exchange Commission applied to Merrill Lynch, before it was acquired by Bank of America in 2009.
According to the SEC, Merrill Lynch did not disclose to investors that a hedge fund, Magnetar Capital LLC, had significant input in the selection of collateral for a pair of complex security vehicles Merrill structured and marketed to investors.
The SEC also charged Merrill with keeping inaccurate records about its participation in a third investment vehicle.
Merrill's omission was significant because Magnetar's interests were “not necessarily aligned” with other investors because Magnetar was betting the value of the investments, known as collateralized debt obligations, would fall, the SEC said in a statement.
“Merrill Lynch marketed complex CDO investments using misleading materials that portrayed an independent process for collateral selection that was in the best interests of long-term debt investors,” said George Canellos, co-director of the SEC's Division of Enforcement.
“Investors did not have the benefit of knowing that a prominent hedge fund firm with its own interests was heavily involved behind the scenes in selecting the underlying portfolios.”
In one case, Merrill, Magnetar and investment advisor Harding Advisory selected the collateral for the “Octans 1” CDO, but a Merrill disclosure mentioned the selection was made only by Merrill and Harding, the SEC said.
In another CDO dubbed “Norma,” Merrill disclosures said the selections would be made by investment adviser NIR Capital Management when in fact one-third of the assets were acquired by Magnetar, the SEC said.
Merrill also violated books-and-records requirements for not disclosing payments to Magnetar related to trades until after the asset was priced, the SEC said.
A Bank of America spokesman said the firm is “pleased to resolve this matter, which pre-dated Bank of America's acquisition of Merrill Lynch.”
The penalty was covered by the bank's existing legal reserves, he added.