Trio of senior Merrill Lynch brokers fired over trades

They’re linked to hedge fund, market timing

By LANDON THOMAS JR. AND RIVA D. ATLAS New York Times

Saturday, October 4, 2003

Merrill Lynch on Friday fired three senior brokers for conducting inappropriate mutual fund trades with a hedge fund at the center of a state and federal investigation into trading abuses, according to an executive briefed on the matter.

In addition, Fred Alger Management, an investment company with $10 billion in assets, suspended three employees because of their possible involvement in some type of improper trading.

The latest actions show how Wall Street firms and fund companies, under increasing pressure from regulators, are working to identify employees who might have engaged in inappropriate fund trading activities and to take action before regulators do.

This week, Alliance Capital suspended two employees, and Prudential Securities dismissed a dozen brokers and managers.

Bank of America has also fired several employees.

The Merrill Lynch brokers allowed the hedge fund, Millennium Partners, to engage in market timing, or trading in and out of mutual funds rapidly for short-term gains, the executive said.

On Thursday, a top trader at Millennium, Steven B. Markovitz, pleaded guilty to trading mutual fund shares after the market close at prices not available to other investors. Called late-day trading, the practice is illegal.

Merrill Lynch has found no evidence that the three brokers were engaged in late-day trading, the executive said.

Market timing is not illegal, but it is considered detrimental to the interests of longer-term investors.

Regulators have said fund companies that allow market timing but discourage the practice in their prospectuses are in violation of their fiduciary duties to their investors.

New York state Attorney General Eliot Spitzer and federal regulators are continuing a wide-ranging criminal investigation of mutual fund trading practices.

Merrill Lynch, with other firms, has received a letter from the Securities and Exchange Commission, requesting information about its policies on market timing and late-day trading, but it has not received a subpoena from New York regulators, the executive said.

The three brokers, whose names were not disclosed, were described as “significant producers” who worked out of a New Jersey branch office for Merrill Lynch.

Though some of the trades were conducted via Merrill Lynch funds, the majority were made in other funds.

Merrill Lynch said it had been examining whether market timing and late-day trading practices existed at the firm.

“We have found no late-day trading,” the company said in a statement. “Our review has revealed certain instances of possible market timing. Consistent with this policy, disciplinary actions have been taken, and the information from our review has been shared with the authorities.”

The Investment Company Institute, the trade association for the mutual fund industry, announced Friday that it would form task forces to devise industry remedies for improper trading of mutual funds.

The suspensions at Fred Alger, which were disclosed Friday on the company’s Web site, accompany an examination by Spitzer and the SEC.

Alger is investigating an arrangement that permitted a customer to trade in the shares of several Alger funds after the market had closed but at the 4 p.m. price, according to the person briefed on the inquiry. The company is still investigating whether the trades were processed appropriately — with the orders placed before 4 p.m. but processed after the market closed — he said.

The trades occurred between March and August of this year, he said.

Alger has brought the trading “to the attention of the regulators,” according to a statement from Alger President Daniel C. Chung.

Officials at the SEC and Spitzer’s office declined to comment.

Alger is just emerging from a difficult period. The company lost its chief investment officer, David Alger, and 20 of 24 fund managers and research analysts in the World Trade Center in the terrorist attacks on Sept. 11, 2001.