The Securities and Exchange Commission yesterday sanctioned Merrill Lynch & Co. for securities transactions with Guarantee Security Life Insurance Co. and Reliance Insurance Co.
"In both situations, the commission found that [Merrill] failed to properly record the terms and conditions of certain transactions which involved the sale and repurchase of certain securities," according to Paul Huey-Burns, an assistant director in the SEC's enforcement division.
The commission also sanctioned Frederick J. Roemer and Robert J. Plunkett, whom Merrill Lynch employed during the Reliance transactions. A Merrill Lynch spokesman said a rumor that Roemer had been fired yesterday was false. Plunkett left Merrill prior to the SEC's investigation.
As a result of the SEC's order, Merrill Lynch must adopt procedures and controls to ensure compliance with the SEC's book's and record provisions and to "cease and desist" from committing future violations, Huey-Burns said. No monetary penalty was assessed, he said.
In a statement, Merrill Lynch said it settled the SEC's administrative proceeding "without admitting or denying any violation."
Merrill Lynch "agreed to the settlement because the SEC's order is limited solely to technical record- keeping matters with respect to the manner in which particular [Guarantee Security Life Insurance Co.] and Reliance transactions were recorded on Merrill Lynch's books," the statement says. Merrill Lynch is "pleased [that] the settlement represents a substantial vindication of its long-standing position concerning the GSLIC transactions - that its trades were legitimate and its conduct ethical and proper," the statement says.
According to the SEC's administrative order, the first alleged misdeeds involved "a series of related sale and repurchase transactions between Merrill Lynch and its customer [Guarantee Security], which straddled" the ends of 1984, 1985, 1986, and 1988.
On or near the last trading day of each of those years, Merrill bought a large amount of junk and utilities bonds and preferred stocks from Florida-based Guarantee Security Life, the order says. Merrill then sold the securities back to the insurer within a few days after the new year at prices designed to produce an agreed-upon fee for the investment banking firm.
The value of the junk involved in the deals ranged from $155 million at yearend 1984 to $296 million at yearend 1986, the order says. In 1985, 1986, and 1988, the deals also entailed Guarantee's purchase of Treasury securities from Merrill. The insurer then sold the Treasuries back to Merrill at roughly the same time that Guarantee bought back the junk.
"The effect of these transactions was to replace temporarily, on the last day of GSL's fiscal yearend, a substantial portion of GSL's portfolio of high-yield securities with a cash receivable in the first year and with a portfolio of liquid Treasury securities in the latter three years," the order says.
For its part, Merrill Lynch received fees of about $25,000 at yearend 1984, $75,000 at yearend 1985, $150,000 at yearend 1986, and $106,000 at yearend 1988, the order says.
"Merrill Lynch should have recorded the yearend transactions as being subject to an understanding to unwind them within the first few trading days of the new year, at the same prices plus the agreed-upon fee, on its order tickets and other books and records which reflected these trades," the SEC order says.
In relation to Reliance, Merrill was found to have improperly recorded the terms and conditions of securities deals involving a series of sale or repurchase transactions between Merrill and Reliance and between Merrill and a second customer.
In June 1986, Reliance approached Frederick J. Roemer, then Merrill Lynch's account executive for Reliance Group Holdings Inc., and proposed selling the firm six issues of investment-grade "cushion" bonds at their then market prices and to buy them back at the same prices after 31 to 40 days.
Roemer approached Merrill Lynch trader Robert J. Plunkett concerning the proposal. Plunkett consulted his supervisor and then asked a second customer to consider entering buy-back agreements with Merrill for the securities that Reliance proposed to sell and repurchase. The second customer agreed to the deal for periods that would enable Merrill to sell the securities back to Reliance at the right time.
Plunkett informed Roemer that Merrill would do the transactions for a spread or commission, and a deal was subsequently struck. Following the 31- to 40-day period, Merrill bought the securities back from the second customer and sold them to Reliance at the original price plus a spread.
"Merrill Lynch violated Section 17(a) of the Exchange Act and Rule 17a-3 thereunder because its books and records failed to reflect properly the transactions with Reliance and failed to reflect timely the repurchase transaction with the second customer," the SEC's order said. "Specifically, Merrill Lynch order tickets prepared by Roemer, documents approved for processing by Plunkett, and other records did not reflect its understanding that it would resell the securities to Reliance."
Envirodyne's a Buy
Duff & Phelps Corp. has issued a "buy" recommendation on Envirodyne Industries Inc.'s when-issued 10 1/4% senior notes at their current trading price of 100.25, according to Carol Goodwin Fuller, a Duff & Phelps vice president.
Envirodyne expects to consummate its reorganization plan by Dec. 31, according to Stephen M. Schuster, a vice president and general counsel at the company. Bondholders forced Envirodyne into involuntary bankruptcy on Jan. 6.
Schuster said Judge John D. Schwartz of U.S. Bankruptcy Court for Illinois' Northern District entered the final order confirming the plan on Dec. 17.
The order was entered after Envirodyne made some minor adjustments to the plan as requested by Schwartz on Dec. 13, Schuster said.
Following the judge's approval, some Envirodyne 13 1/2% subordinated noteholders filed a motion to stay the plan's consummation pending appeals.
Schwartz denied the stay motion unless the noteholders posted a $90 million bond. Schuster said he was unaware whether the noteholders planned to post the $90 million.
"As far as Envirodyne is concerned, there is no stay in effect," Schuster said.
Pursuant to a motion that the 13 1/2% noteholders filed in the District Court for Illinois' Northern District, Eastern Division, the Honorable James H. Alesia has expedited the appeal of one issue relating to the plan. Schuster said the issue is the "X" clause dealing with subordination.
Unless a stay is issued, Envirodyne intends to consummate the reorganization plan by Dec. 31. Consummation entails several "mechanical" steps including finalizing the terms of post-confirmation financing with Continental Bank and Citibank.
At any time after Dec. 27, the company can make physical distribution to creditors, Schuster said. Once that is accomplished, the company will be considered newly reorganized and out of bankruptcy, Schuster said.
Under the reorganization plan, slightly more than $219 million of the new 10 1/4% notes would be issued to Envirodyne's senior discount noteholders. Envirodyne's 13 1/2% holders would get 10% of the stock in the newly reorganized company, and warrants to buy an additional 10%, Schuster said.
In secondary trading, spreads on high-grade issues widened a touch with the Treasury market's run-up. Junk ended mixed.
Northern Trust issued $250 million of 3 5/8% bank notes due Dec. 30, 1994 at par. The noncallable notes were rated Aa3 by Moody's Investors Service and AA-minus by Standard & Poor's Corp. Goldman, Sachs & Co. was sole manager.
Federal Home Loan Banks reportedly issued $50 million of 5.43% notes due 1998 at par. Noncallable for two years, the notes were priced to yield 22 basis points more than comparable Treasuries. Smith Barney Shearson managed the offering.
Beverly Enterprises issued $25 million of 8 3/4% notes due 2003 at par. The notes are callable after three years at par. Moody's rates the offering Ba3, while Standard & Poor's rates it B-plus. Dain Bosworth Inc. was lead manager.