Merrill Lynch Sale of GM Notes Results in $1.9M Fine Over Unfair Pricing

A financial industry oversight group has fined Merrill Lynch $1.9 million for purchasing General Motors notes at unfair prices, also ordering the company to pay $540,000 in restitution to customers. 

The Financial Industry Regulatory Authority (FINRA) determined that Merrill Lynch bought Motors Liquidation Company Senior Notes from retail customers at discounts ranging from 5.3% to 61.5% below market price, then sold them to other brokers and dealers at market prices. Most had markdowns of more than 10% when the company purchased them.

The judgment and fines against Merrill Lynch were announced by FINRA in a December 16 press release, indicating that the GM notes, sold by the auto maker before its bankruptcy, were purchased from customers at unfair prices. FINRA found 716 instances where customers were not paid enough for the GM notes.

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The restitution, which includes interest, is to be paid to the customers who sold Merrill Lynch’s Global Banking & Markets Credit Trading Desk the notes at unfair prices.

In addition to the unfair pricing charge, FINRA also determined that the problems occurred because the company failed to adequately supervise the credit desk, and did not properly review its transactions. FINRA has ordered the company to create three reports over the next 18 months detailing its system of supervising the pricing of retail customer transactions made by its credit desk.

“We expect firms to adhere to their fair pricing obligations to customers when transacting in lower-priced or distressed securities,” said Thomas Gira, FINRA Executive Vice President and Head of Market Regulation. “Even after factoring in the nature of the market for these types of instruments, the markdowns charged were simply unacceptable, as was Merrill Lynch’s failure to conduct post-trade fair pricing or best execution reviews for customer transactions executed on the Credit Desk.”

Merrill Lynch neither admitted to nor denied the charges, FINRA officials said. The company has said that it has already taken disciplinary action and is addressing the problems that led to the marked down purchases.


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