Bank of America Corp.'s Merrill Lynch division agreed to pay nearly $11 million and admit wrongdoing to settle charges it used inaccurate data in executing short sale orders.
The U.S. Securities and Exchange Commission said some securities that Merrill Lynch placed on its easy-to-borrow list for short sales became no longer easily available, but the company's execution platforms were programmed to continue processing short sale orders based on the list.
Short sellers borrow shares to sell them in hopes of buying them back cheaper at a later date, aiming to profit from a price decline.
"When firm personnel determine that a security should no longer be considered easy to borrow, the firm's systems need to incorporate that knowledge immediately," said Andrew M. Calamari, director of the SEC's New York regional office.
Such lists are put together by Merrill and other broker-dealers for customers to "locate" stock for short selling and are comprised of stocks they have deemed readily accessible.
It wasn't until the platforms received the next day's list that they returned to using accurate data, the SEC said. After the agency started investigating, Merrill began implementing systems enhancements to correct the problem, which occurred until 2012, it said.
The bank also agreed to retain an independent compliance consultant as part of the settlement, which included a $9 million penalty, $1.57 million in disgorgement and nearly $335,000 in prejudgment interest.
A representative from Merrill noted the firm has taken steps to improve its controls related to the execution of short sales.
(By Lauren Pollock)