Merrill Lynch Settles Claim It ‘Parked’ Junk Bonds : Securities: SEC charged brokerage with helping disguise ownership of bonds for Florida insurance company.
The Securities and Exchange Commission on Wednesday charged Merrill Lynch and two executives with keeping false books and records in a bond “parking” case brought to the agency’s attention by former Drexel Burnham Lambert junk bond chief Michael Milken.
Merrill, the nation’s largest brokerage, simultaneously agreed to settle the charges without admitting or denying guilt. Its punishment included a censure but no fine.
The charges stem from a longstanding investigation into whether Merrill in the mid-1980s helped a now-defunct Florida insurance company, Guarantee Security Life Insurance Co., hide its poor financial condition by “parking” risky junk bonds for the firm.
Parking involves temporarily holding securities under an agreement to sell them back at the same price. Such transactions are intended to disguise ownership of the securities.
The SEC also charged that Merrill in 1986 failed to accurately record on its books that it had bought and agreed to resell at the same price $68 million of bonds from Reliance Group Holdings, the insurance holding company controlled by financier Saul Steinberg. The alleged purpose was to enable Reliance to realize a gain on the bonds and still end up owning them.
Merrill noted that it had been charged with relatively minor record-keeping violations, not fraud. The company said “it is pleased the settlement represents a substantial vindication of its longstanding position concerning the GSLIC transactions--that its trades were legitimate and its conduct ethical and proper.”
But in an interview, William McLucas, the SEC’s enforcement director, countered: “We did charge that there were violations of the law. . . . My assessment of the settlement isn’t consistent with the interpretation the firm has put on it.”
The SEC has been on a campaign to chastise firms that claim their settlements with the agency have exonerated them.
Merrill bought large amounts of junk bonds from Guarantee Security at the end of each year in 1984, 1985, 1986 and 1988, paying with cash or high-quality Treasury bonds. The firms then reversed the transactions days later at the same prices. The result: Guarantee Security was able to falsely improve its year-end balance sheets.
Government investigators have acknowledged that information from Milken--formerly Merrill’s top competitor--instigated the SEC probe.
Milken’s cooperation with investigators after he pleaded guilty to six felony counts in 1990 led a federal judge to reduce his prison sentence. The ex-financier was released earlier this year, after his 10-year sentence was cut to two years.
