US bank Merrill Lynch has been reprimanded and fined HK$3.5 million ($451,000) by Hong Kong’s Securities and Futures Commission (SFC) for regulatory breaches dating back to before the global financial crisis.
It represents the third time in the past two years that Merrill has been disciplined by the SFC, with fines totalling HK$10 million over the period.
In this latest case, the regulator ruled that the broker-dealer had failed to take adequate steps to handle the complaints of 11 clients who were subject of a fraud carried out by Joyce Hsu Ming Mei, who was accredited to Merrill Lynch between 2007 and 2008.
They had complained to Merrill that Hsu had misrepresented certain investment products to them as principal guaranteed when they were not; had conducted unauthorised transactions, loan drawdowns and fund transfers in their accounts; and had provided false account statements.
In February last year Hsu was sentenced to 42 months in prison after being convicted of 20 counts of theft and 12 counts of access to a computer with dishonest intent.
She had been licensed to carry out type 1 (dealing in securities) and type 2 (dealing in futures contracts) regulated activities. Her licence was revoked in April 2008.
The SFC noted that while Merrill had made enquiries into each complaint it had failed to fully investigate all the relevant circumstances, leading to some complaints being incorrectly rejected.
The principal amount invested by the 11 clients in the disputed investment products was about $7.2 million. Hsu also handled an additional 37 client accounts.
Merrill Lynch has agreed that an independent law firm and auditor will review all client accounts handled by Hsu and assess whether any loss had arisen as a result of her misconduct.
The SFC noted that Merrill had already compensated nine of the 11 complainants and had made significant efforts to resolve the complaints of the remaining two. It also acknowledged that the bank had since strengthened its internal control systems on complaints handling.
In May 2010, Merrill was fined HK$3.5 million for systems and controls failings associated with mis-marking activities in a trading book.
It found that between December 2007 and October 2008 a managing director from Merrill had mismarked a trading book in exotic options by manipulating the volatility marks in the valuation model, and had accessed the computer system without authority to alter pricing parameters on various occasions. The mis-marking resulted in the book’s value being inflated by $25 million.
In May last year the SFC reprimanded Merrill and fined it HK$3 million for inadequate systems in relation to the sale of two index-linked notes to 72 clients.
The regulator said the bank had not properly assessed the financial situation and investment objectives of over 40 of the 72, and expressed concern that key product information was only provided after clients had agreed to invest.