The SEC charged Burton Douglas Morriss and his private investment funds and management firms with a scheme to defraud investors, and obtained a court order to freeze the assets of his St. Louis-based private investment funds and management firms. Morriss, the funds' principal, allegedly raised $88 million from investors, telling them the funds would be invested in emerging financial services and tech companies.
Instead, he transferred millions to himself, without their knowledge or consent, putting the transfers down as “loans” on his books. Some $9 million of those funds went to pay for alimony, costly vacations, including an African safari, and interest on personal loans. Morriss also recruited new investors to one of his funds without the required unanimous consent of his existing investors, diluting their holdings.
“Morriss attempted to hide his illegal transfers of investor funds by calling them ‘loans’ when in reality he had no intention of paying back the money and instead went on a spending spree,” said Eric I. Bustillo, director of the SEC's Miami Regional Office. “It is fraud, pure and simple.”
FINRA fined Merrill Lynch $1 million for failing to arbitrate disputes with its registered reps over retention bonuses.
According to FINRA's findings, after merging with Bank of America in January 2009, Merrill created a bonus program to retain top performing financial advisors and purposely structured it to get around FINRA's requirement that disputes between firms and their advisors over business activities be resolved in arbitration.
In January 2009, Merrill paid $2.8 billion in retention bonuses structured as loans to over 5,000 registered representatives. The notes required the reps to agree that disputes regarding the notes could be brought only in New York state court. New York greatly limits the ability of defendants to assert counterclaims in such actions.
Merrill further structured the program to make it appear that the funds for the program came from MLIFI, a non-registered affiliate, rather than from the firm itself. Later in 2009, after a number of registered representatives left the firm without repaying the amounts due under the loan, Merrill Lynch filed over 90 actions in New York state court to collect amounts due under the promissory notes, violating FINRA's rules.
”Merrill Lynch specifically designed this bonus program to bypass FINRA's rule requiring firms to arbitrate disputes with employees,” said Brad Bennett, FINRA executive vice president and chief of enforcement.