Telling Merrill Lynch to Obey the Law Doesn't Work

Jonathan Weil joined Bloomberg News as a columnist in 2007, and his columns on finance and accounting won Best in the Business awards from the Society of American Business Editors and Writers in 2009 and 2010.
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There was something oddly familiar about the settlement disclosed yesterday between Bank of America Corp.'s Merrill Lynch unit and the Securities and Exchange Commission. The SEC had told Merrill several times before that it wasn't allowed to break the law again. That doesn't seem to have been effective.

Merrill agreed to pay $131.8 million to resolve the SEC's claims that itmisled investors in some collateralized debt obligations back in 2006 and 2007. Per the usual custom, Merrill neither admitted nor denied the allegations.

Here's what caught my eye in the settlement papers, and please forgive the technical language, which I'll explain in a bit. The SEC ordered Merrill to "cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Section 17(a)(1) of the Exchange Act and Rule 17a-3(a)(2) thereunder."

What's interesting is that the SEC in previous settlements had issued cease-and-desist orders against Merrill covering the exact same provisions of the securities laws. There were no penalties for Merrill for violating those earlier orders, beyond what it agreed to pay to make the latest case go away. The SEC often hands out obey-the-law directives like this as part of its deal terms. Only rarely does it enforce them.

In 1998, for instance, Merrill paid $2 million to resolve the agency's claims over some bonds it underwrote for Orange County, California, before the county filed for bankruptcy. The SEC ordered Merrill not to violate Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, which prohibit fraudulent transactions.

In 1999, in a case over fraudulent price quotes on the Nasdaq Stock Market, the SEC ordered Merrill to never again violate Section 17(a) of the Securities Exchange Act of 1934, which covers record-keeping requirements.

The SEC in 2000 issued another order against Merrill barring it from "committing or causing any violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act." The SEC at the time said Merrill had sold U.S. Treasuries to municipalities at excessive, undisclosed markups.

Then came another cease-and-desist orderin 2006, prohibiting future violations of 17(a)(2) of the 1933 Act, as part of a settlement over sales of auction-rate securities.

Will the SEC's latest obey-the-law order do anything to help keep Merrill on the straight and narrow from now on? It's hard to see why it would.

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