Merrill Lynch Soft Dollar Securities Law Violations

Investment and Securities Fraud Lawyer - Levin, Papantonio, Thomas, Mitchell, Rafferty & Proctor


Levin, Papantonio, Thomas, Mitchell, Rafferty & Proctor, P.A. is currently accepting cases on behalf of institutional investors who entered into complex, “soft dollar,” fee arrangements with major Wall Street broker dealers. The Securities and Exchange Commission (SEC) recently charged Merrill Lynch and former Merrill Lynch advisers Michael Callaway and Jeffrey Swanson with securities laws violations. The misconduct stems from relationships between Merrill’s consulting services and the money managers hired by the consultants to control portions of the funds. Acting as fund ‘gatekeepers,’ Merrill Lynch and other major brokerage firms have been engaging in practices designed to increase soft dollar revenue at the expense of pension funds.

The SEC issued a report finding that a majority of pension consultants have relationships with broker-dealers that provide an incentive to recommend an active trading strategy, that pension consultants have relationships with pension plan clients creating significant disclosure and conflict of interest issues, and that many pension consultants do not consider themselves to owe a fiduciary duty to their client. In other words, the SEC has identified relationships between fund consultants, money managers, and broker-dealers generating undisclosed commissions at the expense of the pension fund.

Merrill Lynch and other brokerage firms advertise objective consulting services concerning the recommendation of money managers. However, fund consultants tend to select from a limited pool of money managers that foster beneficial relationships with the consultant’s brokerage firm. The consultants design a soft dollar program, with little or no transparency, whereby brokerage commissions cover consulting fees and costs. The opaque soft cost arrangements tend to not have caps in soft dollars allowing unlimited consulting fees and creating incentives for fund consultants to increase commissions by engaging in ‘active’ management. The consensus among academic financial analysts is that over 90% of a fund’s performance is based on asset allocation or ‘passive’ management. By practicing active portfolio management, fund managers cause the pension fund to underperform not only by deducting excessive commissions but also by ignoring the accepted standards of fund management.

Soon after uncovering the relationships between money managers and fund advisors, the SEC issued subpoenas to Merrill Lynch concerning its pension consulting practices in the State of Florida, where Merrill advises nearly 100 funds. The subpoenas are part of investigations into potential conflicts of interest among fund consultants and money managers. The SEC is concerned that, as its previous examinations suggest, there is a relationship between the advisors and the money managers they select whereby both parties receive inflated fees to the detriment of the pension fund itself.

A couple of years into the investigation, with little information being released to the public, Merrill Lynch wrote its Florida pension clients a letter informing them that the SEC had uncovered regulatory violations. Michael Callaway, the chief of the firm’s Florida operations, wrote that “the S.E.C. staff believes that the firm and I did not tell [the pension plans] all of the relevant information about [the plan’s] fees, manager selection, alleged conflicts of interest, and what I earned in connection with providing you with consulting services.” Mr. Callaway resigned shortly thereafter. The SEC ultimately charged Merrill Lynch for misleading its pension consulting clients. Merrill agreed to settle the charges and pay a $1 million penalty.

Pension fund consultants do owe a fiduciary duty to their clients to minimize investment expenses and to objectively monitor associated money managers. Consultants participating in soft cost programs encouraging increased commissions do not minimize costs and do not objectively evaluate perspective money managers and therefore break their fiduciary duties to the respective pension funds.

If your consultant placed you in complex fee arrangement without disclosing the totality of the fee structure, you may be entitled to recover damages. If you suspect your investment managers have confined you to a limited number of money managers, or have engaged in systematic trading practices designed to earn fees, you may have a claim. Please contact Peter Mougey at Levin, Papantonio, Thomas, Mitchell, Rafferty & Proctor, P.A. so we can assist you with the analysis of your losses.



Pension boards set sights on Merrill Lynch

January 30, 2009

Two Pensacola pension funds are taking aim at Merrill Lynch for what they claim are millions of dollars in losses to employee retirement funds. The board of trustees of the Firefighters' Pension Fund has filed suit in U.S. District Court in Pensacola against the brokerage company and one of its former senior vice presidents. The board claims bad advice and conflicts of interest led to the plan losing more than $3 million over seven years.

Merrill Lynch Charged with Misleading Pension Clients

January 30, 2009

The Securities and Exchange Commission charged Merrill Lynch, Pierce, Fenner & Smith, Inc., along with former Merrill Lynch investment adviser representatives, Michael Callaway and Jeffrey Swanson, with securities laws violations associated with the firm’s pension consulting practices. The charges stem from the firm’s relationships with money managers hired to control portions of pension fund portfolios. Specifically, the firm misled pension consulting clients about its money manager selection process and failed to disclose conflicts of interest when recommending money managers.

Merrill Lynch neglected to inform its clients of arrangements whereby money managers were executing the majority of their trades through Merrill Lynch, allowing managers and advisers to increase fees at the cost of the pension plan. SEC officials noted that this case should remind all pension consulting businesses that they must disclose all material conflicts of interest to their advisory clients.