Probe Mars Merrill Lynch Reputation

Merrill Lynch & Co., the nation’s largest securities firm, has managed, at least until recently, to remain untarnished in the succession of Wall Street scandals, largely because of its tough-as-nails compliance department and a policy of cooperating fully with government inquiries.

But word this week of a Securities and Exchange Commission investigation raises questions about whether the firm may have been involved in a more widespread pattern of improperly “parking” securities. The SEC is looking into whether Merrill Lynch for years helped a Florida insurance company hide its crumbling financial condition from state regulators.

Disclosure of the investigation caused Merrill Lynch’s stock to plummet $2.50 to close at $45 a share Wednesday, before it recovered somewhat Thursday to close up 37.5 cents at $45.375. In a memo circulated to employees Thursday, Merrill Lynch President Daniel P. Tully again strongly denied any wrongdoing by the firm.

The Florida inquiry, however, isn’t the first time that Merrill Lynch’s name has come up in connection with an investigation into parking--prearranged sales in which the seller promises to buy back the same securities almost immediately in a scheme to evade taxes or regulatory requirements.

In 1988, Merrill Lynch escaped prosecution for parking securities for a now-defunct investment firm, Princeton/Newport Limited partners, which had also done business with Drexel Burnham Lambert. The trades allegedly were carried out to help Princeton/Newport evade taxes. At the time, prosecutors were mainly interested in obtaining evidence against Drexel.

Merrill Lynch, as well as Drexel, was mentioned repeatedly in the Princeton/Newport indictment as having engaged in sham trades with Princeton/Newport. But prosecutors stated publicly that they decided not to seek charges against Merrill Lynch or its employees because that firm, unlike Drexel, had cooperated fully with investigators.

Bruce Baird, head of the U.S. attorney’s securities fraud unit in New York at the time of the Princeton/Newport case, confirmed Thursday that prosecutors then didn’t look into whether Merrill Lynch may have made similar questionable trades with firms besides Princeton/Newport. Baird lauded Merrill Lynch’s record of cooperation and said that at the time there was no reason to open a broader inquiry.

Drexel officials and lawyers for that collapsed brokerage still grumble about the government’s decision not to prosecute Merrill Lynch executives in connection with the Princeton/Newport case. Drexel ultimately pleaded guilty to six felonies, admitting wrongdoing that included parking.

The SEC investigation disclosed this week--involving Merrill Lynch and the Florida insurance company, Guarantee Security Life Insurance Co.--focuses on trades that occurred at the same time as Merrill Lynch’s trades with Princeton/Newport.

Between 1984 and 1988, Florida officials said, Guarantee Security at the very end of the year would sell large quantities of junk bonds to Merrill Lynch and buy an offsetting amount of government securities. The sales were then reversed days later.

Government officials have confirmed that the SEC is looking into whether the trades enabled Guaranty Security to get the risky junk bond investments off its books. The reason, in part, was so the insurer could file a year-end report with the Florida insurance commissioner showing a balance sheet with a high proportion of rock-solid but lower-yielding investments in government securities.

Guaranty Security was seized in August by Florida insurance regulators. They stepped in after it suffered huge losses from its junk bond investments. Florida officials also contend that Guaranty’s parent company, Transmark USA Inc., essentially looted the insurance unit.

Merrill Lynch acknowledged that the investigation is under way but strongly denied any wrongdoing.