For Release :March 19, 1997
CFTC ISSUES REPORT OF INVESTIGATION
In the Matter of Merrill Lynch, Pierce, Fenner & Smith, Inc.
WASHINGTON -- The Commodity Futures Trading Commission (CFTC) today announced the issuance of a Report of Investigation (Report) concerning the conduct of Merrill Lynch, Pierce, Fenner & Smith (Merrill Lynch), a Commission registrant. Section 8(a)(1) of the Commodity Exchange Act (CEA) authorizes the Commission to ``publish ... the results of any ... investigation ... as it deems of interest to the public.'' The Report is the first of its kind to be published by the CFTC as a result of an investigation.
The facts addressed in the Report arose out of the Commission's investigation of and subsequent proceeding against Richard Conroy Bell (Bell), an associated person (AP) of Merrill Lynch. From 1990 to November 1993, while employed as a Merrill Lynch financial consultant and AP, and for approximately six months after he left Merrill Lynch in April 1993, Bell -- without the knowledge or consent of Merrill Lynch -- operated a Ponzi scheme. During this time, Bell defrauded approximately 110 investors, some of whom were Merrill Lynch customers, and misappropriated and converted to his own use approximately $8 million from the investors in his commodity pool, which purportedly traded crude oil futures contracts. The CFTC filed an injunctive action against Bell in November 1993, freezing assets and enjoining further unlawful activity (CFTC News Release #3719-93, November 22, 1993). To date, the equity receiver appointed in that action has recovered approximately $4.6 million for return to defrauded investors, including approximately $3.5 million paid by Merrill Lynch. Bell pleaded guilty to a federal wire-fraud charge and is currently incarcerated.
The Report of Investigation examines Merrill Lynch's conduct in fulfilling its responsibility to supervise diligently the activities of its employees. Specifically, the Report notes that in March and April of 1992, Merrill Lynch received three inquiries regarding Bell's conduct, including one from the Oklahoma Department of Securities, which raised issues regarding Bell's business activities outside of his employment at Merrill Lynch. Bell had previously disclosed certain outside activities to Merrill Lynch; however, these inquiries from outside sources called into question the accuracy of Bell's disclosure of the nature of his outside activity and raised issues that properly should have been seen to impact potentially on Merrill Lynch's supervisory responsibilities. In response to these inquiries, Merrill Lynch interviewed Bell and accepted both oral and written representations from him pertaining to his outside activity. Merrill Lynch did nothing to confirm independently or to corroborate any of Bell's explanations, which ultimately proved to be false. The Report notes that, based on Bell's misrepresentations, Merrill Lynch concluded that his outside business was a matter outside the scope of his employment at Merrill Lynch and that, therefore, Merrill Lynch erroneously determined that further investigation was not required.
The CFTC's Report concludes that information regarding an employee's outside business activity, particularly information raising questions about whether the employee has deceived or misled his employer and others, is relevant to an assessment of the employee's ability to continue to perform activities on behalf of his employer and the level of supervision required of that employee. Information, such as that which came to Merrill Lynch's attention, at the very least needed to be investigated sufficiently to determine whether it was relevant to Merrill Lynch's business as a registrant with the CFTC. The Report finds that Merrill Lynch's investigation into Bell's outside activities was inadequate because, among other things, it was limited to obtaining uncorroborated explanations from Bell and therefore did not fulfill Merrill Lynch's supervisory obligations under the CEA and CFTC regulations.
Geoffrey Aronow, Director of the CFTC's Division of Enforcement stated, ``This Report re-emphasizes the Commission's continued concern with proper supervision. The Report makes clear that Commission rules require that a firm properly follow up on all information that raises issues about its supervision of its employees' conduct relating to its business as a registrant. That information can, as it did here, arise from outside business activities. Nevertheless, if that information potentially impacts on the firm's supervisory duties, it must be properly pursued. Merrill Lynch failed to do so here.''
Mr. Aronow also said: ``Because the issue of what level of inquiry a Commission registrant is required to make regarding the outside business activities of its employees when those activities appear to raise issues relating to its business as a Commission registrant is one of first impression, the Commission, in its discretion, determined to issue the Report, in lieu of bringing an enforcement action against Merrill Lynch.''
CFTC Commissioner John E. Tull, Jr., dissented from the Commission's issuance of the Report.
# # #