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Merrill Pays $1 Million to Settle SEC Charges It Misled Pension Funds

Merrill Lynch agrees to settle regulatory charges that a Florida office misled municipal employee pension funds by referring them to a short list of questionable investment advisors.

February 4, 2009
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Merrill Lynch has agreed to pay $1 million to settle regulatory charges that a Florida office misled municipal employee pension funds by referring them to a short list of questionable investment advisors that included one who had a personal relationship with a Merrill manager.

The head of the firm’s 10-employee office in Ponte Vedra South, Michael Callaway, failed to disclose his use of the vacation homes of some principals of a money management firm on the list, the Securities and Exchange Commission alleged.

This firm, which was not identified, was the subject of a number of client complaints about poor performance, the SEC order contended. Many of the advisory firms on the Merrill list weren’t properly vetted by the firm.

The Merrill headquarters office for consulting services was aware that the advisor list provided by the Florida office wasn’t properly vetted and that clients were being misled, the order released Friday alleged.

There was “a vacuum in supervision of the Ponte Vedra South office,” the SEC order said.

The Florida office had about 100 clients, including pension funds for policemen, firefighters and municipal employees, during the 2002-2005 period in question.

Merrill, which was acquired by Bank of America last month, also failed to disclose conflicts of interest when recommending that clients have their advisors execute trades through the firm rather than pay fixed fees, the order alleged.

The firm made more profit from these directed brokerage commissions than it would have received if clients paid only a fee and had their trades executed elsewhere, the SEC contended.

Merrill neither admitted nor denied the charges.

A spokesman, Mark Herr, said the Florida advisors have left the firm and that the firm “voluntarily adopted changes that strengthened our oversight of the consulting services program and compensated, where appropriate, affected clients.”

Callaway, 56, is contesting the charges. His lawyer, Julian Friedman of New York, did not immediately respond to a request for comment Monday, February 2.

Callaway was a senior vice president for Merrill and was employed by the firm from 1976 to 2008, the order said. He is a resident of Ponte Vedra, Florida.

Also charged was former Merrill advisor Jeffrey Swanson, who agreed to a censure without admitting to or denying allegations.

Filed by Neil Roland of Financial Week, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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