Merrill Lynch Acts to Stop Questionable Trades : * Wall Street: The firm has revamped its junk bond operations and reimbursed nine clients after signs of apparent irregularities.

Merrill Lynch & Co. moved Friday to quell damage from signs of apparent trading irregularities by the Wall Street giant’s junk bond desk, saying it had rejiggered the managers and reimbursed nine clients.

The company also said it is cooperating with federal investigators looking into the activities of the 35-person trading desk, which buys and sells the high-yield, high-risk securities for clients and in some cases for the traders themselves.

“We are confident that when all of the facts are fully and fairly evaluated, the conclusion will be that Merrill Lynch has acted properly at all times,” the company said in a news release.

“The question of a corporation’s integrity is addressed by how its management handles a problem when it is discovered,” Merrill Lynch said. In this case, it said, “management has responded promptly with appropriate action, including personnel changes in high-yield sales and trading.”

The statement confirmed an account in the March 9 edition of Business Week, which went on sale Friday, that Brian M. Barefoot, 48, had retired Wednesday as managing director of the junk bond operation.

Barefoot’s responsibilities were immediately assigned to two other managing directors, Seth Waugh, 33, and Edward Sheridan, 37, brought in from other departments, the company said.

Merrill spokesman James Wiggins said Barefoot’s departure stemmed from a decision by the top executives to restructure the department and a “decision that we needed a change of management in that area.”

Wiggins said Barefoot had left amicably and wasn’t implicated in any wrongdoing. Barefoot’s whereabouts were unclear Friday, and there was no listing for him in local telephone directories.

The management shake-up marked the second time in the past five months that Merrill’s junk bond operation has been linked to questionable trading practices.

It also resurrected questions about the extent of unethical and possibly illegal activity in an industry that is still largely responsible for policing itself, despite increased regulatory scrutiny in recent years because of some other big fraud scandals.

On the New York Stock Exchange, Merrill shares fell $2.125 to $55.875, and several other Wall Street brokerage shares weakened as well.

As previously reported, Merrill fired two employees of the junk bond desk Sept. 3 because of evidence they had mishandled a trade of junk bonds issued by Interco, a St. Louis-based manufacturer of shoes and furniture now in bankruptcy reorganization.

Elaborating Friday on the pair’s activity in the news release, Merrill said they had improperly transferred a profitable Interco trade from a customer’s account into their own accounts, and may have engaged in other unspecified behavior “in violation of both company policy and industry regulations.”

Merrill further said that other unidentified employees of the junk bond desk also acquired Interco securities for themselves, with management approval. Coincidentally, Merrill said, their price rose suddenly and unexpectedly. Nine Merrill clients bought the Interco securities at the higher price.

This created at least the impression that the junk bond desk had artificially inflated the value of the securities and sold them to unsuspecting clients. As a result, Merrill said, it reimbursed the clients “to avoid any appearance of impropriety.”

The company didn’t identify the reimbursed clients or specify how much money was involved.

Merrill said that aside from the management shake-up, it is, “as always, cooperating fully with all regulatory agencies.”

In Washington, the Securities and Exchange Commission declined to comment on any Merrill investigation. Spokesman John Heine reiterated SEC policy of neither confirming or denying the existence of probes.

Merrill, based in New York, is the nation’s largest securities brokerage and engages in a range of investment banking and financial counseling activities.

Merrill’s junk bond operation made news in early October, when the company was stung by allegations that it may have “parked” junk bonds for Guarantee Security Life Insurance Co., enabling the Florida insurer to conceal deep financial problems from regulators for years.

Under that arrangement, the brokerage sold the insurer high-quality Treasury securities toward the end of the year from 1984 to 1988 and bought an equal amount of junk bonds in return.

The transactions were reversed early in the following year. Regulators have argued that the effect was to make Guarantee Security’s year-end balance sheet look stronger than it actually was. Merrill has said the arrangement was fully disclosed and legal.