Tech boom excesses haunt Merrill Lynch

Merrill Lynch & Co. Inc., one eye already blackened by a costly settlement of complaints against a Boston broker, is getting another shiner in a case involving an Indianapolis employee.

In a summer of public relations disasters for Merrill, the Indiana episode is another example of the excesses that took place during the tech stock boom – and how they are now coming back to haunt the New York-based company.

In the still-unfolding case, Merrill so far has paid almost $4.4 million in restitution to settle complaints involving Indiana broker Mark David Leavitt, 45, whom it fired last December.

The damage is far from done. About a dozen complaints against Mr. Leavitt are still pending, according to regulators.

The broker allegedly engaged in a raft of questionable activities, including investing in highly volatile penny stocks, according to documents obtained from NASD Regulation, the regulatory arm of the National Association of Securities Dealers.

a failure to supervise

Some observers are wondering how Merrill Lynch, with a reputation for being a stickler on compliance, could have let Mr. Leavitt stray so far without coming under its scrutiny.

But the Leavitt case comes on the heels of another episode, involving well-known broker Dick Greene in Boston.

Over the past year, Merrill Lynch has paid $7.1 million to settle similar claims against him.

Regulators said Merrill Lynch had failed to supervise Mr. Greene, who was widely regarded as the king of Boston’s stockbrokers.

Massachusetts regulators also hit the firm with a $750,000 fine for “overconcentrating” some clients’ portfolios in two or three stocks.

In cases such as those involving Mr. Leavitt, stock brokerages and other financial services companies routinely fight clients tooth and nail to prevent paying damages or restitution. Cases may take years to settle.

The fact that Merrill Lynch began to move so quickly after firing Mr. Leavitt – the company settled the first complaints in February – is an indication to many that the firm realized it was at fault.

Meanwhile, Merrill Lynch’s Indianapolis office has recently seen some turnover at the top.

Michael Welsh, who had been branch manager during at least part of Mr. Leavitt’s time there, unexpectedly retired earlier this summer.

He’s been replaced with a 25-year Merrill veteran, Michael Madigan, the former head of a San Francisco-area office.

In the NASD Regulation documents, the allegations of wrongdoing against Mr. Leavitt center on half a dozen or so volatile stocks, most of which currently trade on the over-the-counter bulletin board.

One company, Americabilia.com (ABIL.OB), changed its stock symbol and relaunched in April 2000, a few weeks after the peak of the dot-com investment mania, and reached $12.50 in its first month of trading.

Last week, Americabilia.com, an Internet company that sells Americana such as Elvis beer steins, was trading at 45 cents per share.

Another favorite of Mr. Leavitt, Migratec Inc. (MIGR.OB), never saw such heady levels. Formerly One Up Corp., it began trading as Migratec in 1998. The maker of computer software touched $3.50 per share in February 2000, but soon slid and has consistently closed below $1. It was trading at around 35 cents last week.

For his part, Mr. Leavitt denies the allegations. He says that the stocks he bought in 1998 and 1999 were not penny stocks at the time, although he admits that they later lost value.

Instead, Mr. Leavitt blames Merrill Lynch for a lack of oversight. He says that to the best of his knowledge, the stocks were not registered properly in Indiana. “Merrill has no choice but to reimburse” the clients, he says.

Merrill disagrees. “That’s ridiculous,” says Bill Halldin, a company spokesman.

The company fired Mr. Leavitt because he “recommended stocks for which Merrill did not have research,” Mr. Halldin says. Most of the allegedly dubious trades occurred last year, he adds.

Mr. Halldin says that Mr. Leavitt falsified documents for stock trades, marking solicited orders, or orders in which a broker asks or convinces a client to trade, as unsolicited.

In a fine point, state laws regarding unregistered securities apply only to cases in which the trades were solicited, he says.

In 13 cases that were settled, restitution payments ranged between $39,000 and about $2.1 million.

Meanwhile, the state is investigating Mr. Leavitt, says Bradley Skolnik, the head of the Indiana Securities Division.

Mr. Leavitt maintains that his record as a broker is clean. He does, however, have a history of customer complaints at Dean Witter before he joined Merrill in 1994, according to the NASD Regulation documents.

The Dean Witter cases, however, are much smaller in scope.

One, which settled for $11,500, alleged that the client was not in an appropriate mutual fund and was not given enough information about investing on margin. The other case settled for $15,500.

Many in the brokerage industry regard such relatively small settlements as a cost of doing business and an avoidance of lengthy and expensive lawsuits.