The Wall Street Journal-20080114-SEC Looks at Merrill Trading- In Search of -Front-Running-
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SEC Looks at Merrill Trading, In Search of 'Front-Running'
The Securities and Exchange Commission is investigating whether several current and former employees at Merrill Lynch & Co. improperly placed trades for the brokerage house's own account ahead of client orders, people familiar with the matter said.
The probe is the latest twist in a look at information-sharing across Wall Street and heightens the regulatory scrutiny into Merrill Lynch. The SEC already is investigating how the firm valued securities tied to home mortgages as well as the timeliness of those disclosures.
Merrill Lynch is expected to report results this week, and analysts predict substantial write-downs, which will likely draw the attention of regulators.
The trading probe is a broad look at the relationship between big, institutional investors and the brokerage house. Specifically, one area of inquiry involves whether certain Merrill employees improperly stepped in front of orders placed by Fidelity Investments, the large mutual-fund operator, these people said. The period under scrutiny covers 2002 through 2005.
Some of the traders no longer work at Merrill, one person said. A Merrill Lynch spokesman said the firm always cooperates with regulatory inquiries and declined to comment further.
The practice is known as "front-running," and previous regulatory scrutiny has resulted in regulatory fines and changes in industry practice. It gives an unfair advantage to traders because orders from big investment houses such as Fidelity often move stock prices.
For example, if a trader received an order from an institutional investor to buy stock, the trader could then step ahead of the order to buy shares for the house account that could then be sold to Fidelity at a higher price, locking in a profit.
The investigation into Merrill's house trading is advanced, although it isn't clear whether the SEC will file a civil lawsuit.
It comes amid increased scrutiny into whether there is a widespread leak of nonpublic information around trade orders, merger announcements and corporate fund-raising from private investors.
Last winter, the SEC and Justice Department announced charges against several former employees of UBS AG and Morgan Stanley involved in a complex insider-trading ring. Several people have pleaded guilty.
That followed a "sweep" examination in January 2007, when the SEC asked almost a dozen brokerage houses for trading and other data for a specified two-week period in September 2006.
The goal was to determine whether information was being shared across firms amid concerns hedge funds were receiving information about a broker's other clients, including mutual funds.
The SEC probe into Merrill's trading didn't evolve from the sweep, one person familiar with the matter said.
