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Brokerage is Focus of State Probe
Knowledge of activities of rogue broker at issue
By Steven Wilmsen, Globe Staff, 10/21/99
State securities regulators have launched an investigation of Merrill Lynch & Co.'s Boston office to determine what the brokerage knew of the investment activities of a rogue broker who allegedly bilked clients of about $6 million over a decade.
The investigation comes after The Boston Globe reported that former Merrill Lynch broker Donald Martineau persuaded clients, including close friends and family, to put their money into a fake real estate investment that in reality was an account Martineau controlled. In some cases, he forged signatures and wire transfer documents to spirit money from client accounts, Martineau said in a confessional note he wrote to family and friends in August 1998, when his scheme began to unravel.
Martineau, who has filed for bankruptcy protection and says he no longer has the money, is being investigated by the US Securities and Exchange Commission and federal prosecutors, who are expected to bring criminal charges against him.
But the latest investigation is the first to target Merrill Lynch, which according to federal law is required, like all brokerage firms, to closely monitor the conduct of brokers and investment advisers.
'The facts of this case warrant an inquiry into the question of what they knew and when they knew it,' said Secretary of State William F. Galvin. 'If they didn't know what was going on, the question becomes, 'Could they have known?' We have very strong regulations on this point.'
The brokerage, while cooperating fully with the investigation, claimed it 'did not and could not have known' of Martineau's scheme, said Merrill Lynch spokesman Bill Halldin. He said Merrill Lynch had no inkling of Martineau's activities until Martineau confessed in August 1998, when the brokerage reported the matter to 'all the appropriate regulators and authorities.'
But several Merrill Lynch brokers who worked with Martineau in the Boston office are expected to testify to state investigators today that Martineau's activities were known around the office.
'We know they have information that others at Merrill Lynch knew what he was doing,' said a source in Galvin's office close to the investigation.
Among the questions investigators seek answers to is how Martineau could have carried on the scheme for nearly a decade without being detected. According to lawsuits filed by bilked clients and notes Martineau left with a brother-in-law, he began some time in the late 1980s advising a few clients to invest heavily in a venture he controlled called D&D Real Estate. He allegedly claimed D&D made short-term loans to options traders and guaranteed a high annual return, according to a client's recent lawsuit. But the company, whose address is a leased post office box in North Andover, turned out to be 'nothing more than a pyramid scheme,' one suit alleges.
Merrill Lynch officials say there was no way they could have detected those transactions because they took place in accounts that weren't sanctioned or monitored by the brokerage. The officials also said Martineau in some cases specifically instructed clients not to discuss those investments with anyone at Merrill Lynch. In a few cases, Martineau apparently engaged in transactions that should have been easier to detect, regulators said. He told some investors he was putting their money into Merrill Lynch-backed investments when in fact he was transferring the money to an account he controlled, according to records Martineau left with his brother-in-law. He also said he typed up documents for his clients to sign that led them to believe he was moving money into safe investments. Then he transferred the signatures to a document authorizing him to put the money in an account he controlled.
'The records that are needed to perform transactions like that tend to be controlled by the firm,' Galvin said. 'It tends to make it hard for the firm not to know.'
Merrill Lynch officials said those instances were rare and performed in such a way as to be undetectable to management.
State investigators also will focus on what Merrill Lynch knew about Martineau's personal investing habits. In his confessional note, Martineau alluded to large losses from trading options, a complex and risky form of investing rarely used by individuals.
According to Merrill Lynch documents obtained by the Globe, Merrill Lynch officials noted in an April 1989 memo that Martineau had losses of more than $250,000 in a personal account where he traded options.
The officials told Martineau that 'it seemed imprudent for him to speculate such a large portion of his liquid assets' and suggested he cut down on the amount he traded in options, according to the memo. A second memo dated September 1989 showed losses of $166,000 in an account Martineau opened in May of that year.
'If nothing else, you would think somebody at the firm would say, 'Wait a minute, he can't handle his own account,' said Timothy Cagle, an attorney representing Martineau's brother-in-law, John Macoul, who lost $245,000. 'And yet Merrill Lynch let him go on, unquestioned, handling other people's money.'
Merrill Lynch officials said that while that kind of activity in a broker's personal account generally can trigger heightened scrutiny by the firm, there was no indication of trouble in any of Martineau's clients' Merrill Lynch accounts.
'In a situation like that, we may more carefully review client accounts,' spokesman Halldin said. 'But the activity in this case didn't occur in Merrill Lynch accounts and wasn't available for Merrill Lynch to monitor.'
If the state investigation turns up wrongdoing, Merrill Lynch could face fines of $10,000 for every infraction and potential criminal proceedings, regulators said. The state could also order the firm to pay clients the money they lost. Merrill Lynch says it has reimbursed those clients who didn't know their money was going into Martineau's real estate venture but it has declined to pay others.
globe.com.
PS - A poster here on SI asked why I didn't have 3 line break charts on the indexes. The idea just slipped by me so I made some up last night and will add them to my site this weekend. However, they are steadily down and did not reverse up during the last rally. He may be on to something here. Thanks
Good Luck,
Lee |
