FINRA Fines Merrill Lynch $1 Million for Failing to Monitor Employees After Broker Found Running Ponzi Scheme
This week, FINRA announced that it has charged Merrill Lynch with failing to supervise one of its employees who successfully ran a Ponzi scheme using Merrill Lynch accounts. According to FINRA’s findings, Bruce Hammonds misrepresented to investors that his company, B&J Partnership, invested in oil contracts, S&P index futures, and international hedge funds. Hammonds promised investors returns from 30 to 100 percent and told them that B&J was affiliated with Merrill Lynch. Instead, Hammonds invested less than 10% of the funds and pocketed the rest. Hammonds engaged in these fraudulent transactions undetected, attracting over $1 million in investments from eleven individuals, for over ten months. Hammonds was permanently barred from the securities industry in 2009.
Merrill Lynch never approved of Hammonds’s activities, but the company approved his request to open an account in B&J’s name. Hammonds told his employers that he was funding the account with proceeds from his house-flipping business. This representation was belied by B&J’s partnership agreement, which stated that the firm was formed to conduct a securities business with Hammonds as president. Merrill Lynch never reviewed B&J’s partnership agreement as part of the account approval process.
Until last year, Merrill Lynch used its Employee Activity Review System (“EARS”) to monitor employee account activities. The flaw with EARS was that it monitored accounts opened using the employee’s social security number or accounts that employees self-reported as “employee-interested.” Hammonds opened B&J’s account using its own tax identification number, not his social security number, and never indicated that B&J’s accounts should be monitored by EARS.
FINRA found that EARS was inadequate to monitor and supervise employee accounts for compliance with NASD and FINRA rules. Specifically, FINRA concluded that Merrill Lynch should not have relied on employees to self-report their interests in accounts. Because the firm did not have a system in place to ensure that all employee-interested accounts were reviewed by EARS, Merrill Lynch failed to monitor roughly 40,000 employee and employee-interested accounts from 2006 to 2010. After the Bank of America takeover, Merrill Lynch transitioned to a new system to monitor employee accounts.
After Hammonds’s fraud was discovered, Merrill Lynch reimbursed investors for their losses. FINRA levied a fine of $1 million. The firm neither admitted nor denied the charges but consented to the entry of FINRA’s findings and conclusions.