Merrill Lynch Settles Broker Case
With Massachusetts Regulators
By JOHN HECHINGER and CHARLES GASPARINO
Staff Reporters of THE WALL STREET JOURNAL
Merrill Lynch & Co. agreed to pay a $750,000 fine to state securities regulators for alleged broker abuses that triggered investor claims of $30 million in losses from as many as 400 clients.
In a settlement with Massachusetts Securities Division, regulators alleged that Richard F. Greene -- a 38-year Merrill veteran and one of its top-producing brokers -- improperly put investors in little-known stocks that later plunged in value.
Under securities rules, brokers must ensure that investments are suitable for clients and avoid overconcentration in a handful of risky investments. Merrill, the nation's largest brokerage firm, neither admitted nor denied the allegations. The fine represented one of the largest a state has ever levied against a brokerage firm.
The cases represented "a systemic lack of oversight" by Merrill in the state, alleged Massachusetts Secretary of State William Francis Galvin, whose office oversees the securities division.
Merrill said there was no systemic problem; it noted that the cases include a tiny fraction of its 450 Massachusetts brokers.
Mr. Greene, 66 years old, couldn't be reached for comment. He was widely admired in the Merrill sales force and sought after as a broker. Before he retired in December 1998, he had about $1.5 billion under management, 1,400 clients and five assistants, according to regulators. He generated about $10 million a year in commissions and earned nearly $4 million a year.
Gerald Rath, Mr. Greene's Boston attorney, says that until he left the firm, Mr. Greene hadn't faced a single formal complaint in his 38 years at Merrill.
Mr. Rath and a Merrill spokesman said analysts at the firm and other big securities houses had recommended the stocks that lost much of their value. These include nursing-home operator Genesis Health Ventures Inc., two real-estate investment trusts, Eldertrust Inc. and Indymac Mortgage Holdings Inc., and Orbital Sciences Corp., a spacecraft concern. Mr. Greene owned the stocks in his personal account while his clients did, according to people familiar with the matter.
Genesis now trades at 40.625 cents on the New York Stock Exchange, down from a high of $39.75 in 1997. Eldertrust traded as high as $19.625 a share in 1998, and is now down to $2.6875 on the Big Board.
"This is a guy who has a long and distinguished career," Mr. Rath said. "He was remarkably successful, and that was directly attributable to hard work and good results for his clients."
Under the agreement with Massachusetts, Mr. Greene's customers will submit claims to a mediator appointed by the securities division.
Merrill also agreed to pay the cost of mediation -- typically $3,000 to $5,000 a case -- which typically is shared by the client. Customers with more than $25,000 in losses and more than 50% of their accounts in the four stocks that regulators cite are eligible for mediation. Merrill also agreed to pay a total of $100,000 to a fund for investor education.
Within 30 days, Merrill must also retain an outside consultant to review compliance procedures in Boston, and report to the state every six months for two years.
The second case covered by the settlement involved Donald J. Martineau, a 22-year former broker, also in the Boston office. In a guilty plea in a Boston federal court, Mr. Martineau, 56, admitted to defrauding clients, including two brothers-in-law, of $6.3 million from November 1989 to August 1998, when Merrill fired him.
Prosecutors and state regulators say Mr. Martineau transferred client funds out of Merrill accounts by cutting and pasting signatures from past authorizations for wire transfers. Mr. Martineau, who then transferred the money to a personal account, lost almost all of it in options trading, prosecutors say.
State regulators allege that Merrill should have noticed many "red flags" about Mr. Martineau's activities, including what they described as "patently altered" transfer forms. Merrill, for its part, says that Mr. Martineau "concealed most of the fraudulent transactions outside of Merrill Lynch accounts." His attorney, Nelson P. Lovins, declined to comment.
John Macoul, Mr. Martineau's brother-in-law, lost $245,000, according to state records, and holds Merrill partly responsible. "They knew they had an out-of-control, problem broker," says Mr. Macoul, 51, a Salem, N.H., attorney. "They didn't take appropriate precautions and safeguards to make sure nobody got hurt."
Write to Charles Gasparino at charles.gasparino@wsj.com and John Hechinger at john.hechinger@wsj.com |
