Report: SEC Preparing Case Against Merrill Lynch Over Notes That Lost 95%

(RTTNews) - The U.S. Securities and Exchange Commission is preparing a civil enforcement case against Merrill Lynch (MER) over an investment that fell as much as 95% in value and was marketed in a way that one of the firm's financial advisers called "borderline crooked," the Wall Street Journal reported citing people familiar with the matter.

The expected case against the brokerage arm of Bank of America Corp. underscores some of the risks of so-called structured notes, securities custom-built by banks out of options and other derivatives and often sold to retail investors.

It also brings to light a dispute between Merrill and two of its brokers who sold structured notes to their clients. With clients complaining after the value of the notes plunged, the brokers secretly taped calls with executives at Merrill, left the firm for rival UBS Group AG and then filed a whistleblower complaint over the notes with the SEC.

The report said that the probe involves a product called Strategic Return Notes that Merrill sold over a number of months in 2010, raising about $150 million. Linked to a Merrill Lynch index tracking the volatility of the S&P 500 stock index, the five-year notes lost value rapidly after they were issued, as market volatility fell and the cost of buying the options upon which the notes were based rose sharply.