Post by jcline on Nov 2, 2007 15:17:28 GMT -5
STOCKGATE TODAY
An online newspaper reporting the issues of Securities Fraud
Merrill Denial exposes Corporate Policy Deficiencies - November 2, 2007
David Patch
It's all over the news; Merrill Lynch is under SEC investigation for possible fraud attributed to questionable deals made with hedge funds where the intent of the arrangements was to delay the reporting of heavy mortgage backed security losses.
While the news first broke through the WSJ the rest of the business media has picked up on the story and has forced Merrill Lynch to respond to the allegations.
In a carefully crafted release Merrill Lynch states, "We have no reason to believe that any such inappropriate transactions occurred. Such transactions would clearly violate Merrill Lynch policy."
This should bring confidence to all investors who hold long the Merrill Lynch stock. The allegations can't be true because Corporate policy bans this behavior.
But wait a minute, now that I read the comments I am not so sure that what Merrill is reporting is exactly accurate, or worse. It does not actually state that Merrill did not engage in such acts, it simply says the Company does not believe the allegations could be true because to do so would imply that a rogue within the company violated company policies.
Of course, nobody breaks Merrill company policy correct?
So I ponder, was it accepted company policy to put out false research reports in order to pump garbage stocks to the public so the firm could offload their positions? Certainly by participating in the $1.4 Billion Global Settlement with the SEC, NASD, and NY Attorney General Merrill accepted responsibility for engaging in deceptive practices.
I am also wondering if it was accepted company practice to allow hedge funds to come through the Merrill Lynch trade desks and engage in market timing/late trading of mutual funds. Merrill settled for $13.5 Million in 2005 on charges of fraud associated with the illegal practice. By all accounts however the Merrill policies must not have credited this as being illegal since Merrill today claims policy violations do not occur at the firm.
And of course there was barge-gate of 1999 where Merrill had purchased an interest in several Nigerian barges that Enron owned but could not sell. The purchase was later exposed as accounting fraud as the barges were repurchased six months later by an Enron controlled entity at a prearranged price. The purpose of the sale was to simply take the barge liabilities off the books of Enron for a prearranged period of time. Several Merrill brokers were convicted in the fraud scheme but the convictions were later overturned. The overturned convictions do not dismiss the fact that Merrill was involved in what turned out to be a fraud scheme.
So I ask again, is the statement that the allegations now surfacing regarding Merrill's attempts at diverting losses off the books a matter of company policy violations or is it that company policies are riddled with holes that allows for fraud to exist and go undetected at the firm?
Some at Merrill should be concerned, as this matter is only one degree of freedom removed from similar efforts undertaken by former Refco CEO Phillip Bennett.
Recall, Bennett was caught moving bad debt off the books of Refco through a scheme using a hedge fund as well. Bennett, unlike Merrill, moved the debt off the books regularly as each quarterly filing was come due.
In the Refco scheme Bennett arranged at the end of every quarter for a Refco subsidiary to lend money, upwards of$430 Million in bad debt money, to a hedge fund called Liberty Corner Capital Strategy, which then lent the money to Refco Group Holdings. Bennett's company then paid the money back to Refco, leaving Liberty as the apparent borrower when financial statements were prepared. The scheme erased the debt from the books of Refco.
If true, the parallels to the Merrill scheme are eerily similar.
According to the Wall Street Journal, Merrill was removing the uncertainty in losses relating to certain mortgage backed securities by selling the commercial paper to hedge funds. The risks to the Hedge Fund through the purchase by this paper was eliminated through contract terms where Merrill would repurchase the paper one year later at a guaranteed minimum price. The result of this shell game would allow Merrill to delay the losses associated with the commercial paper had they carried the paper on the books and had difficulties selling the paper to other investors.
With all this insight before us we still are left to ponder, Is Merrill's compliance operations failing to enforce company policy or are Merrill's Company policies flexible enough that fraud can be excercised without compliance detection?
Blue Plate Special: To understand more about Wall Street, Regulators, and the financial media go to www.Deepcapturethemovie.com to view a Presentation made last month at the 2007 PIPE's Conference held by DealFlowMedia.com in New York City.
For more on this issue please visit the Host site at www.investigatethesec.com
Copyright 2007
An online newspaper reporting the issues of Securities Fraud
Merrill Denial exposes Corporate Policy Deficiencies - November 2, 2007
David Patch
It's all over the news; Merrill Lynch is under SEC investigation for possible fraud attributed to questionable deals made with hedge funds where the intent of the arrangements was to delay the reporting of heavy mortgage backed security losses.
While the news first broke through the WSJ the rest of the business media has picked up on the story and has forced Merrill Lynch to respond to the allegations.
In a carefully crafted release Merrill Lynch states, "We have no reason to believe that any such inappropriate transactions occurred. Such transactions would clearly violate Merrill Lynch policy."
This should bring confidence to all investors who hold long the Merrill Lynch stock. The allegations can't be true because Corporate policy bans this behavior.
But wait a minute, now that I read the comments I am not so sure that what Merrill is reporting is exactly accurate, or worse. It does not actually state that Merrill did not engage in such acts, it simply says the Company does not believe the allegations could be true because to do so would imply that a rogue within the company violated company policies.
Of course, nobody breaks Merrill company policy correct?
So I ponder, was it accepted company policy to put out false research reports in order to pump garbage stocks to the public so the firm could offload their positions? Certainly by participating in the $1.4 Billion Global Settlement with the SEC, NASD, and NY Attorney General Merrill accepted responsibility for engaging in deceptive practices.
I am also wondering if it was accepted company practice to allow hedge funds to come through the Merrill Lynch trade desks and engage in market timing/late trading of mutual funds. Merrill settled for $13.5 Million in 2005 on charges of fraud associated with the illegal practice. By all accounts however the Merrill policies must not have credited this as being illegal since Merrill today claims policy violations do not occur at the firm.
And of course there was barge-gate of 1999 where Merrill had purchased an interest in several Nigerian barges that Enron owned but could not sell. The purchase was later exposed as accounting fraud as the barges were repurchased six months later by an Enron controlled entity at a prearranged price. The purpose of the sale was to simply take the barge liabilities off the books of Enron for a prearranged period of time. Several Merrill brokers were convicted in the fraud scheme but the convictions were later overturned. The overturned convictions do not dismiss the fact that Merrill was involved in what turned out to be a fraud scheme.
So I ask again, is the statement that the allegations now surfacing regarding Merrill's attempts at diverting losses off the books a matter of company policy violations or is it that company policies are riddled with holes that allows for fraud to exist and go undetected at the firm?
Some at Merrill should be concerned, as this matter is only one degree of freedom removed from similar efforts undertaken by former Refco CEO Phillip Bennett.
Recall, Bennett was caught moving bad debt off the books of Refco through a scheme using a hedge fund as well. Bennett, unlike Merrill, moved the debt off the books regularly as each quarterly filing was come due.
In the Refco scheme Bennett arranged at the end of every quarter for a Refco subsidiary to lend money, upwards of$430 Million in bad debt money, to a hedge fund called Liberty Corner Capital Strategy, which then lent the money to Refco Group Holdings. Bennett's company then paid the money back to Refco, leaving Liberty as the apparent borrower when financial statements were prepared. The scheme erased the debt from the books of Refco.
If true, the parallels to the Merrill scheme are eerily similar.
According to the Wall Street Journal, Merrill was removing the uncertainty in losses relating to certain mortgage backed securities by selling the commercial paper to hedge funds. The risks to the Hedge Fund through the purchase by this paper was eliminated through contract terms where Merrill would repurchase the paper one year later at a guaranteed minimum price. The result of this shell game would allow Merrill to delay the losses associated with the commercial paper had they carried the paper on the books and had difficulties selling the paper to other investors.
With all this insight before us we still are left to ponder, Is Merrill's compliance operations failing to enforce company policy or are Merrill's Company policies flexible enough that fraud can be excercised without compliance detection?
Blue Plate Special: To understand more about Wall Street, Regulators, and the financial media go to www.Deepcapturethemovie.com to view a Presentation made last month at the 2007 PIPE's Conference held by DealFlowMedia.com in New York City.
For more on this issue please visit the Host site at www.investigatethesec.com
Copyright 2007