Merrill Lynch, Pierce, Fenner & Smith Inc. has been fined $1 million for supervisory failures that allowed a Texas broker to run a Ponzi scheme.
The Financial Industry Regulatory Authority, which levied the fine, said San Antonio broker Bruce Hammonds convinced 11 individuals to invest more than $1 million in a Ponzi scheme he ran as the B&J Partnership for more than 10 months.
Merrill Lynch supervisors approved Hammonds' request to open a business account for B&J and failed to supervise funds that customers deposited and Hammonds withdrew, the independent regulator of brokers said.
Hammonds was fired by Merrill Lynch and went to jail. FINRA permanently barred Hammonds from the securities industry in December 2009. Merrill Lynch reimbursed all investors were harmed by Hammond's misconduct.
In levying the fine, though, FINRA found that Merrill Lynch "failed to have an adequate supervisory system in place to monitor employee accounts for potential misconduct."
Merrill Lynch's supervisory system automatically captured accounts an employee opened using a social security number as the primary tax identification number, it said.
However, if the employee's social security number was not the primary number associated with the account, the system failed to capture the account in its database, according to FINRA. Instead, Merrill Lynch solely relied on its employees to manually input these accounts into its supervisory system.
FINRA also found that from January 2006 to June 2010, Merrill Lynch failed to monitor an additional 40,000 employee accounts.
"Firms must ensure their supervisory systems are designed to properly monitor employee accounts for potential misconduct. Merrill Lynch's inadequate supervisory system and the firm's excessive reliance on employee self-reporting enabled Hammonds to facilitate his Ponzi scheme to the detriment of investors,'' Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said.
Merrill Lynch neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
When barring Hammonds, FINRA found that Hammonds told his customers and investors that his member firm would manage their investments, and he misrepresented the type of products the partnership would invest in and the investment returns.
The findings also included that, rather than investing the money Hammonds received in indexed funds, futures contracts or securities as he represented to customers and investors, he misappropriated the funds, using them to pay for personal expenses as well as to pay investor returns typical of a Ponzi scheme.
FINRA found that Hammonds provided customers and investors with fictitious account statements reporting growth in their investments.
In 2009, Hammonds was given two, 57-month sentences Friday despite vows to pay back the $1.4 million he took from investors.
At the time, he was ordered to pay back $1.1 million to Merrill Lynch and almost $60,000 to two clients he continued to defraud after he was fired.
"My actions were deplorable, disgusting," Hammonds said, during his sentencing hearing. "I look back at that time and I wonder who that person was.
Hammonds was fired in June 2008. Bank of America acquired Merrill Lynch at the end of 2008, following the eruption of the global financial crisis in September.
-- This article first appeared on Securities Technology Monitor.
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