BAC Bank of America Corporation

The Bank of America unit was accused of misusing customer cash by the SEC

By Jenny Strasburg and Aruna Viswanatha 

Bank of America Corp. will pay $415 million to resolve accusations from the Securities and Exchange Commission that it misused customer cash and securities to generate profits, the agency said Thursday.

The bank's Merrill Lynch brokerage unit put at risk customer assets worth as much as $5 billion to $58 billion at a time, depending on the week, over a period spanning 2009 to 2015, the SEC said. The regulator said customers bore risks because the bank didn't set aside enough money in safeguarded accounts meant to act as a cushion in case of financial trouble.

The U.S. lender admitted to wrongdoing in agreeing to the settlement, part of which covered a series of complex trades conducted from 2009 to 2012. The SEC said these trades lacked economic purpose and were designed to boost profits by artificially reducing walled-off deposits.

The trades essentially provided "interest-free loans of customer money," Andrew Ceresney, the SEC's enforcement director, told reports on a conference call.

The Wall Street Journal first disclosed details of those trades and the SEC probe in April 2015. The Journal reported Wednesday on the planned settlement, which includes the SEC's second-largest penalty ever against a Wall Street firm.

"While no customers were harmed and no losses were incurred, our responsibility is to protect customer assets and we have dedicated significant resources to reviewing and enhancing our processes," Bank of America said in a statement. "The issues related to our procedures and controls have been corrected."

The bank said it cooperated fully with the SEC investigation, and the settlement will have no effect on second-quarter results.

The SEC also sued the firm's former head of regulatory reporting, William Tirrell, saying he "aided and abetted" the customer-protection violations.

Mr. Tirrell, 61, is disputing the civil allegations.

Tirrell's lawyer, Steven M. Witzel, said his client "looks forward to the opportunity to vindicate himself at trial."

Merrill Lynch also separately agreed to pay a $10 million penalty to resolve an SEC case accusing it of misleading customers on structured notes. It paid an additional $5 million to settle a similar case with the Financial Industry Regulatory Authority.

Former Bank of America executives acted as whistleblowers in the investigation, according to Jordan A. Thomas of law firm Labaton Sucharow LLP. He said in a statement that the firm represents multiple former executives of the bank in the matter.

The SEC declined to comment on the origins of its investigation or whether any whistleblowers aided the probe, citing agency policy.

The $415 million settlement concerned Rule 15c3-3, a part of the Securities Exchange Act of 1934 known as the customer-protection rule. The 1972 rule is aimed at ensuring that banks and trading firms safeguard enough cash and easy-to-sell securities in so-called lockup accounts that, in the event of failure, can be used to pay back customers.

The 2008 collapse of Lehman Brothers and, later, of MF Global Inc. left many brokerage customers waiting for billions of dollars to be returned. Regulators have since strengthened the customer-protection rule.

The Charlotte, N.C.-based bank's Merrill Lynch unit violated the rule in part by structuring billions of dollars of loans to finance "riskless trades that lacked defined terms and economic substance," the SEC said. The regulator's characterization of the trades as "riskless" suggests it saw no purpose to the trades except to influence the amount of cash and securities held in safeguarded accounts. Bank of America bought brokerage firm Merrill Lynch in 2009.

Those deals were done through a strategy internally dubbed "leveraged conversion." They used options trades to extend loans to customers that improperly helped Merrill Lynch finance its own activities, the SEC said. Clients were recruited specifically for the strategy, the SEC said.

In a series of communications with Wall Street regulators starting in 2009, Mr. Tirrell and the bank omitted key facts and failed to update regulators about changes to the structure or purpose of the trades, the SEC said.

The loans reduced the amount of funds the bank held as a cushion and lowered its financing costs, the SEC said. As The Journal previously reported, those savings generated profits for employees in a small unit known as Structured Equity Finance and Trading.

SEFT, as it was known, kept about half the leveraged-conversion trading profits, which the SEC said totaled about $50 million. The Journal earlier this year reported on Bank of America's dismantling of SEFT following heightened scrutiny of its activities, including separate trades that helped clients avoid stock-dividend taxes.

In further violations from June 2009 to April 2015, the SEC said Merrill Lynch put billions of dollars of client assets at risk by failing to safeguard customer securities from potential creditors' claims as required. No customers suffered losses as a result, and the bank fixed the problems, the SEC said.

The SEC said Thursday it will conduct a broader 15c3-3 compliance sweep seeking "documents and data" from broker-dealers and will ask them to report potential rule violations.

The size of the Bank of America penalty reflects the "unprecedented violations" of the rule and was "significantly increased" by the bank's disclosure failures, Mr. Ceresney said.

The pact is the SEC's largest related to the customer-protection rule. The SEC also criticized severance agreements Bank of America had drawn up with some employees that discouraged them from voluntarily providing confidential information to regulators. The bank has changed its severance agreements, the SEC said.

Write to Jenny Strasburg at jenny.strasburg@wsj.com and Aruna Viswanatha at Aruna.Viswanatha@wsj.com

(END) Dow Jones Newswires

June 24, 2016 02:47 ET (06:47 GMT)

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