By Pam Martens and Russ Martens: March 22, 2018

As front page news focuses more and more on the Russia-Trump investigation, there is rarely an in-depth journalistic investigation into the dangerous risks building up on Wall Street that makes front page news. And yet, as we know from the epic financial crisis of 2008, an unreformed Wall Street presents the gravest threat to America’s long-term vitality and economic might.

Take, for example, what happened this past Monday. The U.S. Securities and Exchange Commission (SEC) awarded a record $83 million to three whistleblowers from one of America’s largest retail brokerage firms, Merrill Lynch, part of the sprawling Bank of America. That bank holds $1.4 trillion in deposits, much of which is FDIC insured and backstopped by the U.S. taxpayer — the same taxpayer that bailed out Bank of America in 2008.

The SEC maintains the confidentiality of whistleblowers who come to it and does not name the company involved in the monetary awards to ensure that confidentiality. The public learned of the details in the case through a statement from the law firm representing the three whistleblowers, Labaton Sucharow.

The statement, also released on Monday, explained why this unprecedented amount of money was paid by the SEC. It said:

“The whistleblowers tipped the SEC to long-running misconduct at Merrill Lynch, which over numerous years, executed complex options trades that lacked economic substance and artificially reduced the required deposit of customer cash in the reserve account. Through the reckless conduct, Merrill Lynch violated the SEC’s Customer Protection Rules and put billions of dollars of customer funds at risk in order to finance its own trading activities.”

But wait. Wasn’t the Dodd-Frank financial reform legislation of 2010 with its Volcker Rule supposed to stop Wall Street firms with insured banking operations from trading for the house? We know from the London Whale saga of 2012 where JPMorgan Chase used hundreds of billions of dollars of depositors’ money to trade in high risk derivatives in London and lost $6.2 billion of depositors’ money that the Volcker Rule did not reform these Wall Street behemoths. Now we have even more evidence from this outrageous conduct by Merrill Lynch.

In fact, the JPMorgan London Whale and the Merrill Lynch debacles have five things in common: regulators were misled; customer cash was put at risk; the conduct was maniacally brazen; the actions took place under the nose of a key executive of the firms; and both incidents occurred at two of the largest Wall Street firms in the nation long after the passage of Dodd-Frank. This strongly suggests that Wall Street needs tighter regulation, not the de-regulation the Senate passed last week.

The SEC settled the case against Merrill Lynch on June 23, 2016 for $415 million and an admission of wrongdoing. According to the SEC’s order at the time, the mishandling of customer cash occurred from 2009 until 2012 while the mishandling of customers’ securities occurred from 2009 to 2016. Both sets of dates show clearly that the Dodd-Frank financial reform legislation, which was signed into law in 2010, is not taken seriously by the mega banks.

The SEC order explains Merrill Lynch’s brazen conduct as follows:

“This matter arises from significant violations of the Customer Protection Rule that began during the Financial Crisis and, in certain respects, continued until this year.  The violations were twofold.  First, ML used cash belonging to its customers to fund its own business activities through a series of increasingly complex trades.  Second, at the same time and continuing for years due to poor oversight and weak controls, MLPF&S allowed certain of its clearing banks to hold general liens over tens of billions of dollars of securities owned by its customers…”

The SEC also explains how this could have all blown up:

“ML used these Trades to remove up to $5 billion of customer cash week over week from its customer reserve account.  ML then used these funds to finance its business activities.  Had ML failed when the Trades were in use, its customers would have been exposed to a shortfall of customer cash in the customer reserve account.”

As for the brazen misuse of customer securities, we’re not talking about chump change either. The SEC explains:

“From June 2009 to April 2015, MLPF&S held up to $58 billion of customer securities in a clearing account that was subject to a general lien by one of its clearing banks.  In addition to this account, until as recently as this year MLPF&S held approximately $1.38 billion in customer securities in 6 other clearing accounts in Europe and Asia as of the end of 2015 that also were subject to liens and approximately $4.8 billion in 48 other accounts in Europe, Asia, and Australia as of the end of 2015 that lacked documentation establishing that they were not subject to liens.  Had MLPF&S failed during this period, these liens, and the resultant uncertainty, would have hindered or prevented MLPF&S’s customers from retrieving their securities and could have significantly further damaged public confidence in the U.S. brokerage and securities industries during or after the Financial Crisis.”

There is one other very troublesome element of the Merrill Lynch matter that should concern all Americans. At the same time that the SEC brought the order against Merrill Lynch, it also brought a proceeding against a Merrill executive, William Tirrell, for aiding and abetting the violations. The SEC said that Tirrell had “touted” in writing in an internal document his ability to ‘utilize the regulatory systems and skill sets for business purposes” and had “failed to disclose the true purpose of the leveraged conversion trades to regulators.”

One particular paragraph in the SEC proceeding against Tirrell takes one’s breath away. It refers to what Tirrell was representing to regulators versus what was actually going on inside Merrill Lynch. It reads:

“Another difference with this version of the Trade relates to the prices used.  Because the prices used for OTC options are not reported and are not exposed to the market, ML could depart from the prevailing market price of the securities and reverse engineer prices, often at off-market levels, to achieve a precise amount of compensation for the counterparty participating in the Trades.  Again, Tirrell did not disclose this change to FINRA [Wall Street’s self regulator] despite the focus on market exposure at the August 2009 meeting.”

This sounds like Merrill was not just exploiting its customers but was artificially manipulating prices in the stock market. And yet, the matter is simply glossed over in one brief paragraph.

Then there is the raft of charges brought against Tirrell by the SEC on June 23, 2016 versus the final quiet SEC settlement with him on September 1, 2017 under the Trump administration. The SEC did not impose a fine against Tirrell; it did not ban or suspend him from the industry. It simply told him to knock it off, writing that he should “cease and desist from committing or causing violations of and any future violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-3 thereunder.” That appears to leave all of the other sections of the Exchange Act as open turf for gaming.

Even after Merrill Lynch paid its $415 million fine, Merrill continued to keep Tirrell on its payroll. According to FINRA records, after the fine was paid in June 2016, Tirrell remained an employee of the firm for more than a year.

The Tirrell case reminded us of another Merrill scandal that occurred in the 90s. A Merrill Lynch stockbroker, Michael Stamenson, sold billions of dollars of exotic securities to Orange County, California, which ran a pooled investment fund for close to 200 cities and school districts in the county. The county lost $1.7 billion when the highly leveraged fund imploded. Orange County had to file bankruptcy, resulting in serious job losses and cutbacks in social services to the poor. In all, Merrill made approximately $100 million in fees. Stamenson received compensation from Merrill of $4.3 million in just the two-year period of ’93 and ’94.

Stamenson’s character was put on display in court proceedings as the star of a Merrill Lynch training video for rookie stockbrokers.  In the video, he explains what it takes to succeed on Wall Street: “the tenacity of a rattlesnake, the heart of a black widow spider and the hide of an alligator.”

Despite strong evidence against Stamenson, Merrill Lynch continued to pay annual compensation of $750,000 to him and eventually settled the case for $400 million and sealed all the court documents. It also paid $30 million to Orange County to settle and abruptly end a grand jury investigation, leading to media outcries.

All of this strongly supports the assertion that Wall Street greed is insidious and it can never be meaningfully controlled. The only means of limiting risk to the U.S. taxpayer and the U.S. economy is to break up these mega banks by restoring the Glass-Steagall Act. This would separate the devious deeds of securities firms from the insured depository banks holding trillions of dollars of Americans’ life savings and end the risk of another epic Wall Street bailout.