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Bank of America's Merrill Lynch routinely misled customers by telling them billions of stock trades had been managed in-house when they were actually turned over to outside firms, part of a five-year scheme that New York's attorney general says made the bank's trading services appear more sophisticated than they were.
On Friday, the attorney general announced a $42 million settlement with Bank of America over what it called the "masking" strategy, which was applied to 16 million client trade orders between 2008 and 2013, representing over 4 billion traded shares.
New York's Eric Schneiderman said Bank of America admitted to having undisclosed agreements with electronic trading firms Citadel Securities, Knight Capital, D. E. Shaw, Two Sigma Securities and Madoff Securities to handle the trades instead.
"Bank of America Merrill Lynch went to astonishing lengths to defraud its own institutional clients about who was seeing and filling their orders, who was trading in its dark pool, and the capabilities of its electronic trading services," the attorney general said in a statement.
The misleading activity began in 2008. Bank of America hid the secret trading activity by reprogramming its systems to alter confirmations sent to clients about how their trades were handled. Bank of America employees referred to this activity as "masking," Schneiderman said.
In an emailed statement to CNBC, Bank of America said, "The settlement primarily relates to conduct that occurred as long as 10 years ago. At all times we met our obligation to deliver the best prices to clients. About five years ago, we addressed the issues concerning communicating to clients about where their trades were executed."
Bank of America was also accused of making inaccurate representations to investors about its trading services. It told them that as many as 30 percent of trades in an internally managed electronic trading pool came from retail investors, for example, when it was really more like 5 percent.
Two years ago, Schneiderman struck settlements with Credit Suisse, Barclays and Deutsche Bank over trading abuses. Credit Suisse and Barclays paid $30 million and $35 million, respectively, to settle allegations they misrepresented to customers how trades were handled in so-called dark pools, which are private electronic trading sites where buyers and sellers are supposed to be protected from predatory high-speed trading behavior. Deutsche Bank paid $18.5 million to settle allegations it engaged in fraud in its trade order routing practices.
The three banks also settled parallel investigations with the Securities and Exchange Commission.