Bank of America Merrill Lynch has reached a settlement agreement with the Securities and Exchange Commission related to its 2011 sale of shares of a Chinese software company that had been found to be operating a fraud scheme.
The
SEC announced Thursday morning it settled with Merrill Lynch Pierce Fenner & Smith Inc. for its failure to perform proper due diligence functions in the unregistered sales of shares of Longtop Financial Technology Ltd.
Merrill Lynch, which did not respond to a request for comment, is required to pay a penalty of $1.25 million and more than $154,000 in disgorgement and prejudgment interest from commissions and fees earned on the improper sales.
The SEC's order found that Merrill Lynch violated Sections 5(a) and 5(c) of the Securities Act of 1933.
According to the settlement, without admitting or denying the SEC's findings, Merrill Lynch agreed to be censured and consented to the order requiring it to cease and desist from committing or causing any future violations of the registration provisions of the Securities Act.
The SEC's order found that Merrill Lynch sold almost three million shares of Longtop Financial securities into the market despite "red flags" indicating that the sales could be part of an unlawful unregistered distribution.
Ultimately, the distribution generated almost $38 million in proceeds for the overseas issuer and its affiliates, according to the SEC.
"That penalty is a nothing more than a slap on the wrist; it's a rounding error for Merrill," said Andrew Stoltmann, a securities attorney and president of the Public Investors Arbitration Bar Association.
"This is another black eye for Merrill, which shows shoddy supervision," he added. "It's certainly not shocking to see them get whacked, but in this environment, when a firm gets caught with its hand in the cookie jar, it should get hit harder."
According to the
case summary, from Jan. 24, 2011, to Aug. 18, 2011, Merrill violated the registration provisions of federal securities laws by effecting unregistered sales of nearly three million shares of Longtop Financial securities for a customer.
Longtop's securities were trading in the U.S. as American Depository Shares. Longtop's chairman had obtained the three million shares from Longtop as one of the company's founders.
In the
summer of 2010, the chairman purported to gift the Longtop ordinary shares through a
trust to current and former employees of Longtop, who were purported beneficiaries of the
trust.
The related ADSs were then sold in about 68 transactions through an account at Merrill's Singapore branch office.
"This was a real problem," said Adam Gana, a securities lawyer and managing partner at the law firm of Gana.
"When you distribute $38 million worth of investments, you gotta do your due diligence," he added. "The regulators are serious, and I think penalizing Merrill eight times the size of the commissions they earned shows they're serious."
