(March 30th, 2018) by Jay Hawk
New York Attorney General Eric Schneiderman reported in a press release that Bank of America Merrill Lynch (BAC) will pay a $42 million penalty to the State of New York as a settlement for an investigation into the bank’s fraudulent practices involving the financial institution’s electronic trading services. The $42 million penalty, which was announced on the 23rd of March, was the largest ever charged by a state government related to an investigation into electronic trading practices.
Attorney General Schneiderman stated in closing his remarks that, “I urge all members of the financial community to evaluate and if necessary reform your practices around electronic trading services, to ensure that you treat each and every client, big and small, ethically and loyally.” He added that, “For those financial institutions that refuse to do so, we will hold you accountable”.
Bank of America stock had risen slightly over the past year from just under the $30 level to close at a high of 32.84 on March 12th. It then weakened notably ahead of this penalty announcement on March 23rd to make a new yearly low at $29.17 before correcting somewhat higher on profit-taking activity.
Bank of America Merrill Lynch Admits its Lack of Required Disclosure
Bank of America Merrill Lynch (BofAML) admitted that it had made agreements with electronic liquidity providers or ELPs that were not disclosed to their clients. These undisclosed agreements that the bank systematically concealed from its clients over a five-year period, were with Madoff Securities — yes, that Madoff — as well as with Citadel Securities, D.E. Shaw, Knight Capital and Two Sigma Securities. The investigation showed that BofAML secretly routed its customer’s orders for stock trades and other equity securities to these firms for execution.
In addition, the NY Attorney General’s inquiry revealed that BofAML had made other misleading statements to its clients about aspects of their electronic trading services that made it appear safer and more reliable than what they really were. In paying the penalty, the bank also admitted to violating the Martin Act, New York securities law, and the New York Executive Law.
The violations began in 2008 and involved the bank concealing the routing of millions of dollars in equity trades to the ELPs mentioned above. The bank also lied to its clients, saying that those orders were executed in-house at BofAML. In order to perpetrate the fraud, BofAML resorted to a process known as “masking”, which involved replacing the ELP’s identity code with a code identifying the transaction as an in-house trade with BofAML.
This masking strategy was implemented with more than 16 million client orders during the five year period between 2008 and 2013, and represented over 4 billion traded shares. Furthermore, the investigation uncovered post-trade reports and client invoices that had been altered and would have ordinarily shown where the trades had been executed.
The Banking Industry’s Sordid Record of Securities Law Violations
This action against BofAML marks the latest in a series of investigations into major banks’ activities that have been settled with the New York Attorney General’s office.
In January of 2016, Barclays (BCS) settled with the AG’s office for $35 million after admitting it had violated securities laws. Also, in January of 2016, Credit Suisse (CS) settled with the NY AG’s office for $30 million after admitting it had misled clients regarding the operation of the company’s “dark pool”.
The previous major fine assessed before this one against BofAML was against Deutsche Bank in December of 2016, when it settled with the NY AG’s office for $18.5 million after admitting it had violated New York State’s securities laws.
More Lawsuits and Settlements against Bank of America
Unfortunately, Bank of America has been no stranger to paying large fines and settling multi-billion dollar lawsuits that dwarf even this large penalty. In 2011, Bank of America was sued by American International Group for $10 billion, which was settled by Bank of America agreeing to pay $8.5 billion to investors that claimed the bank fraudulently sold them mortgage securities just ahead of the 2008 Financial Crisis.
Furthermore, in February of 2012, Bank of America and four of the nation’s largest mortgage servicers agreed to provide $26 billion in relief to distressed homeowners and directly to the U.S. Federal and state governments. Later in September of that same year, Bank of America settled out of court in a class action suit filed by shareholders that were misled in the company’s purchase of Merrill Lynch.
Shortly afterwards, in October of 2012, the bank was hit by U.S. Federal prosecutors with a $1 billion Federal civil lawsuit for mortgage fraud under the False Claims Act, which provides plaintiffs with as much as triple penalties for damages. The lawsuit was for the Countrywide fiasco, in which a mortgage lender owned by Bank of America rubber-stamped mortgage loans to borrowers with little or no income, thereby forcing U.S. taxpayers to guarantee billions of dollars in bad real estate loans. Bank of America settled that lawsuit by agreeing to pay $6.3 billion to Freddie Mac and Fannie Mae and to repurchase approximately $3.2 billion in mortgage bonds.
The latest large settlement Bank of America paid out was in August of 2014, when the bank settled with the Department of Justice for $16.5 billion. This consisted of $7 billion in consumer relief and $9.65 billion in penalty payments to U.S. Federal and state governments for the sale of risky mortgage-backed securities before the 2008 Financial Crisis.
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