US market regulators on Thursday censured a Merrill Lynch brokerage unit, charging the company with selling the unregistered shares of a Chinese business software firm accused of falsifying its accounts.
Merrill Lynch, Pierce, Fenner & Smith Inc, a unit of Bank of America, neither admitted nor denied the allegations but agreed to pay a $1.25 million fine and to return $154,000 in disgorgement of revenues and interest, according to the US Securities and Exchange Commission.
‘A broker-dealer has a duty to conduct a reasonable inquiry and know its customers before effecting unregistered sales of securities,’ Antonia Chion, associate director of the SEC’s enforcement division, said in a statement.
The case had been at the center of a long-running battle between the SEC and the accountancy Deloitte Touche Tohmatsu, which found itself caught between Chinese data secrecy laws and American investigators’ demands for audit records.
In 2011, Merrill Lynch sold almost three million shares in Longtop Financial Technologies Ltd., a Cayman Islands-incorporated software and consulting firm based in Xiamen, China and Hong Kong.
But the broker failed to act on red flags indicating the shares were part of an illegal and unlawful distribution, according to the SEC.
Longtop’s chairman had purported to use a series of trusts to ‘gift’ the shares to current and former employees – but instead moved proceeds from sales via Merrill Lynch to a Hong Kong bank account controlled by Longtop affiliates, including its CEO and a board member.
The trades were executed by Merrill’s New York office on instructions from company representatives in Singapore after Merrill employees failed to determine whether the shares could be sold without registration.
The transactions generated $38 million in proceeds for Longtop and $127,000 in commissions and fees for Merrill.
The New York Stock Exchange delisted Longtop’s shares in 2011 after Deloitte Touche Tohmatsu quit as Longtop’s auditor, accusing the Chinese company of falsifying sales and balance sheet records.
The SEC in 2014 dropped an action against Deloitte Touche Tohmatsu seeking records on Longtop after Chinese authorities provided them.