Merrill Lynch Censured

The smallest dabbler in penny stocks and the manager of a billion-dollar mutual fund have at least one thing in common: both men are always alert for the inside tip, the informed gossip that can lead to quick profit. Not surprisingly, stockbrokers often pick up those tips ahead of their customers. And they usually pass the information along to large institutions whose trading pays big commissions. Last week, for just such misuse of inside information, the Securities and Exchange Commission severely penalized the world's biggest brokerage house, Merrill Lynch, Pierce, Fenner & Smith.

Consent and Denial. In its confidential role as underwriter for the Douglas Aircraft Corp. during 1966, Merrill Lynch learned that the company's first-half earnings would be down sharply.

According to the SEC, the bad news was reported to 15 mutual funds and other big institutional customers as early as June 20 -- four days before Douglas an nounced its troubles. During that period Douglas stock dropped from $90 1/2 a share to $69; the investment companies liquidated or sold short their holdings, thus saving or earning a total of $4,500,000. Merrill Lynch was paid for its early-warning services, contended the SEC, by the commissions it collected on the institutional trading. And even as the big organizations were dumping Douglas, Merrill Lynch continued to buy the stock for some of its smaller customers.

The brokerage house denies any wrongdoing. But in order to bypass the courts, Merrill Lynch "consented to findings of violations" of the federal securities laws "without admitting" the validity of the charges. Explained President Donald T. Regan: "We decided it would be best not to engage in a prolonged and costly dispute with a Government agency." Such litigation would probably have worked its way up to the U.S. Supreme Court and taken years to resolve. During that time, the case would have continued to generate even more harmful publicity.

By settling with the SEC, the firm managed to blunt some of the impact of the case. Still, the SEC publicly rebuked ten Merrill Lynch employees, and seven were ordered temporarily suspended without pay. Among them were Archangelo Catapano, a vice president and the firm's aerospace specialist, who was suspended for 60 days, Philip F. Bilbao, vice president and manager of institutional services, and five of his salesmen each drew 21 days. Three other Merrill Lynch employees, including two more vice presidents, were just censured. The commission also ordered Merrill Lynch to close its New York institutional sales office for 21 days and its West Coast underwriting office for 15 days during December, one of the year's heaviest trading periods. The closings may cost the firm more than $500,000 in lost business.

More to Come. The stain on the image of the firm that likes to boast that it brought Wall Street to Main Street will be difficult to erase. The 15 institutional investors accused of acting on the Merrill Lynch tip--including Dreyfus Corp., the Madison Fund and Investors Management Co.--are still to appear before an SEC examiner for hearings on the Douglas case. And individual Merrill Lynch customers who feel that they were wronged by the Douglas incident may claim compensation for their losses.

Whatever the outcome of those suits, the SEC obviously hopes that the case will serve as a warning to Wall Street's leaders to think twice before passing inside information to anyone--unless it is simultaneously released to everyone. From now on, if the SEC has its way, the securities industry will run scared.

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