On January 25, 2011, the SEC charged Merrill Lynch, Pierce, Fenner & Smith Incorporated with securities fraud for misusing customer order information to place proprietary trades for the firm and for charging customers undisclosed trading fees. According to the SEC, between 2003 and 2005, Merrill Lynch had an Equity Strategy Desk (“ESD”) whose traders used information about institutional customer orders from trades on the market making desk to place trades on Merrill Lynch’s behalf after executing customer trades, which was contrary to Merrill Lynch’s representations to customers. The ESD traded securities solely for the firm's own benefit and had no role in executing customer orders.
The SEC also found that, between 2002 and 2007, Merrill Lynch had agreements with certain institutional and high net worth customers providing that Merrill Lynch would only charge a commission equivalent for executing riskless principal trades, but that in some instances, Merrill Lynch also charged customers undisclosed mark-ups and mark-downs. The undisclosed trading fees were accomplished by filling customer orders at prices less favorable to the customer than the prices at which Merrill Lynch purchased or sold the securities in the market. Merrill Lynch agreed to pay a $10 million penalty and consent to a cease-and-desist order.