Registered representatives of Merrill Lynch were able to run various schemes that led to the theft of more than $6 million in customer funds because the firm failed to “reasonably supervise” customer fund transfers, according to a settlement the wirehouse signed with the with the Financial Industry Regulatory Authority earlier this week.
Without admitting or denying guilt, the firm agreed to be censured and to pay $950,000 for failing to reasonably supervise the transmittal of externally-initiated ACH (Automated Clearing House) transfers from May 2013 to November 2018, according to a letter of acceptance, waiver and consent (AWC) Finra published December 20.
“As a result, the firm failed to detect that two of its registered representatives were able, in separate schemes that ran for multiple years, to steal in excess of $6 million,” Finra said.
Said Bill Halldin, a spokesman for Bank of America, the parent company of Merrill Lynch, "As the settlement notes, several years ago we developed an enhanced monitoring system to detect possible inappropriate transactions. Clients impacted by the conduct of these two former financial advisors have been compensated."
Finra alleged in the settlement that Merrill was aware of the risk “that brokers could steal money from customers via ACH transfers initiated outside the firm by 2013,” because it terminated an unnamed rep in May 2013 who used the ACH system to transfer $100,000 from two customer accounts to her own accounts, including her credit card account.
“At the time the registered representative was terminated for this misconduct, two other Merrill representatives (Representatives 1 and 2) were engaged in similar misconduct,” Finra said.
While associated with Merrill from January 2011 to December 2017, Rep 1 made approximately 270 unauthorized ACH transfers from five customer accounts to his credit card accounts, totaling approximately $3.2 million. Four of the customers were seniors, according to the settlement.
The rep, who was barred by Finra in 2018, “concealed his fraud, in part, by creating and distributing unofficial account summaries to the customers, which contained inflated account values,” Finra said.
Rep 2 made over 300 unauthorized ACH transfers from eight customer accounts, totaling approximately $3.2 million, between December 2007 and November 2018, primarily to pay his credit cards, the self-regulator said.
Both Merrill reps initiated their ACH transfers at other financial institutions with Merril acting as the recipient of the funds, Finra noted.