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Merrill Lynch to Pay $10 Million in New Jersey Settlement

March 15, 2005
Merrill Lynch will pay New Jersey $10 million and implement significant reforms throughout the firm to resolve allegations that it failed to reasonably supervise certain financial advisers in New Jersey who market timed mutual funds in violation of the firm’s policies.

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The agreement reached by Attorney General Peter C. Harvey settles allegations by the New Jersey Bureau of Securities concerning trading by a hedge fund, Millennium Partners, L.P. The allegations focus on market timing conduct by three financial advisers who joined Merrill Lynch’s Fort Lee branch office in January 2002.

Millennium was a prior client of the three Merrill Lynch employees, and they continued market timing for Millennium at Merrill Lynch, seeking to profit from market fluctuations by trading in and out of mutual funds using accounts at Merrill Lynch as well as outside accounts. Over a third of the trades involved mutual funds held as sub-accounts of variable annuity contracts purchased for Millennium.

Despite warnings from supervisors that they were violating Merrill Lynch’s policies, the financial advisers continued to market time for Millennium until they were fired in October 2003, using multiple accounts, undisclosed agreements and other ploys to conduct and disguise their trading. They did not keep records of trades placed through non-Merrill Lynch variable annuity contracts or placed directly in mutual fund accounts held outside of Merrill Lynch.

“Merrill Lynch failed to reasonably supervise these financial advisers, whose market timing siphoned short-term profits out of mutual funds and harmed long-term investors,” said Attorney General Harvey.

“To resolve these securities issues, Merrill Lynch has agreed to implement reforms to enhance supervision of its financial advisers, particularly in the area of annuities, where trading in annuity sub-accounts has been done under the radar, without records. This is an industry-wide issue, and the record-keeping and supervision requirements in this agreement should set a new standard.”

New Jersey worked with the New York Stock Exchange, which is announcing a separate settlement with Merrill Lynch.

The three financial advisors, and a fourth who was involved to a lesser degree, placed 12,457 trades for Millennium in at least 521 mutual funds and 63 mutual fund sub-accounts of at least 40 variable annuities. Millennium made profits in over half of the funds and fund sub-accounts. In those funds where Millennium made profits, its gains totaled about $60 million.

Under the agreement, the firm will pay New Jersey a $10 million civil penalty. In addition, the firm and its affiliate Merrill Lynch Insurance Group Inc. will implement new procedures to maintain, as a required “book and record” under New Jersey and federal securities laws, records of all client reallocation requests made through a Merrill Lynch employee that involve mutual funds held as sub-accounts of variable annuity products of outside insurance carriers.

Neither firm recorded those requests in the past. By properly treating such transactions as subject to the requirement that financial advisers record every request by a client for a trade of a security, Merrill Lynch will subject such transactions to oversight under its policies requiring supervisors to review such records to monitor trading.

Merrill Lynch will implement and enforce a new policy and procedure addressing how financial advisers should deal with instructions from clients to trade mutual funds in accounts held outside of Merrill Lynch. All such transactions are subject to New Jersey and federal books and records requirements. Merrill Lynch also will issue a global compliance alert to all of its financial advisers, supervisors and compliance personnel reinforcing its policies and procedures mandating retention and review of correspondence with clients. The firm has agreed to fully cooperate with the State in any investigation or litigation related to this matter.

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