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Did Merrill Lynch break a promise?

Did Merrill Lynch engage in Me First financial advising at the expense of Florida pension fund clients?

A Securities and Exchange Commission charge early this year claims Merrill and two Florida investment advisers failed to disclose conflicts of interest to pension fund clients. Merrill settled the SEC case for $1 million.

That's not the end of the matter. Area pension funds are suing Merrill and a former Merrill adviser in Florida named Michael Callaway, who once ran the firm's consulting group for roughly 100 Florida pension funds.

Earlier this month, the pension fund maintained by the City of Largo for its retired and disabled police officers and firefighters sued Merrill and Callaway. And last week, another pension fund for St. Petersburg's retired and disabled firefighters also sued, making similar arguments.

It's not clear how many more lawsuits in this state may arise. Two Pensacola pension funds considered suing earlier this year. But Merrill and Callaway, who operated out of a Ponte Vedra office near Jacksonville before retiring in September 2008, may be busy for some time. Callaway denies wrongdoing.

Why do we care? Because the allegations portray Merrill and Callaway as manipulating investment procedures for pension fund clients to boost their own commissions at the expense of pension fund returns.

Because pension funds are plagued by advisers whose lack of transparency continues to produce confusion and inefficient fund management at a time when pension funds are most in need.

Because the financial industry already suffers from poor credibility. Merrill's woes are amplified in Florida, for example, because of the poor disclosure record by the State Board of Administration, which controls more than $100 billion in pension funds for Floridians.

Pension funds already are pressed to make up for big losses in the market or find themselves forced to add more money into funds to cover pension obligations. The latest lawsuit allegations make it feel as if pension funds are getting kicked when they're already down.

The SEC started investigating possible conflicts of interest among advisers to pension funds as far back as 2005. After settling SEC charges this year, Merrill neither admitted nor denied the violations, but agreed to be censured and to refrain from future violations of securities laws.

In the lawsuit brought on behalf of Largo police officers and firefighters, Merrill and Callaway held fiduciary duties to manage the interests of their client pension funds. Instead, the lawsuit says, the advisers used investment procedures from affiliated service providers to increase their commissions at the expense of the pension fund.

The lawsuit by St. Petersburg's firefighter pension fund makes similar allegations. Callaway, the suit says, recommended "aggressive" trading over index funds because active trading generated higher commissions, recommended weaker-performing money managers when the payoff for Merrill was better, and misled customers about their fund's performance.

Consider this just one page in the giant Book of Financial Cleanup that this country needs to read and preach.

Robert Trigaux can be reached at Read more at his Venture blog at

Did Merrill Lynch break a promise? 10/26/09 [Last modified: Monday, October 26, 2009 11:00pm]
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