Bank of America and its broker-dealer unit, Merrill Lynch Pierce Fenner
& Smith Inc., will pay a total of $5 million in settlements for allegations
of misleading prosecutors and regulators during investigations of former
New York swaps traders. The bank and its broker-dealer unit are accused
of carrying out futures trades after becoming aware of large trades in
the pipeline, according to prosecutors.
Jill Westmoreland Rose, U.S. Attorney for the Western District of North
Carolina, announced the settlement along with the Commodities Futures
Trading Commission ("CFTC") on September 22, 2017. This $2.5
million CFTC settlement on so-called "pre-hedging" actions comes
on the heels of a separate $2.5 million deal BofA made with Rose's
office back in 2015.
Investigators contend that at least three former New York traders listened
in on phone conversations between BofA sales staff and large financial
institutions. The traders used the information about block futures trades
to piggyback new trades that would offset the bank's risk.
The tactic is known as anticipatory, or pre-hedge investing. According
to Rose's office, the traders pre-hedged with trades in the same contract
as the block futures trades, as well as trading in other correlated products.
Anticipatory investing in itself is not a crime. Many buyers utilize the
practice of taking a long or short position in the market to reduce the
risk of financial loss. The eavesdropping aspect of the case, however,
poses a problem as traders illegally obtained information and capitalized
on such facts. Conversations between Bank of America sales associates
and financial institutions were meant to be confidential. The trader's
probing violated these privacy requirements by using the information for
The New York traders did not admit to spying when the CME Group initially
commenced investigations into the matter in 2009. Rose was able to pinpoint
the supposed misconduct of three traders and determined that pre-hedge
practices were carried out in 2008 and 2009. According to Rose's office,
in 2010, Bank of America initially denied the identified parties as having
advanced knowledge about block trades. The bank later revised its denial
in 2013, by saying "the traders had traded ahead of blocks from time
As a result of Bank of America’s 2013 statement, and further investigations
conducted by the CME Group and Rose’s office, the financial institution
agreed to settle the matter with Rose in 2015. Merrill Lynch Pierce Fenner
& Smith Inc. was also penalized for failing to maintain accurate brokerage
records. The group has since promised the CFTC that it will improve its
procedures to meet the standard of what is acceptable in brokerage record-keeping.
Ms. Rose said she is pleased with the outcome of the settlement. "The
settlement reinforces our expectation that firms effectively monitor their
employees and deal candidly with all regulators and law enforcement agencies,”
she said. She also believes that such outcomes reinforce the oversight
responsibility that firms must share in managing employees, as well as
cooperating honestly with law enforcement and regulators when investigations arise.
"We cooperated with the authorities on these matters and have implemented
improvements to our monitoring process," Bill Haldin, a spokesman
for Bank of America, said in a statement.