Filed under: Bad news, Law, Scandals, Merrill Lynch (MER)

Today’s Wall Street Journal has reports of two possible cases of serious ethical lapses [subscription required] at some of Wall Street’s most revered institutions.

First, a study has shown an interesting pattern: the investment arms of investment banking institutions buying large stakes in companies shortly before a deal is announced involving the same company — with the investment banking arm of the institution having worked on the deal.

There’s nothing inherently illegal or unethical about that, as long as it’s a coincidence. But if money managers at the institution were tipped off about the deal, it’s a serious crime. The Journal on one study that examined deals and 13-Fs filed by institutions, and found that 19.5% of the time, large investment banks serving as lead advisers accumulated large stakes before a deal was announced. That’s about twice as often as banks not involved with the deal accumulated shares.

Some question the study’s methodology, but it’s been enough to pique the interest of FINRA.

Meanwhile, the SEC is investigating (subscription required) whether several current and former employees at Merrill Lynch (NYSE: MER) engaged in the front-running of client trades: receiving an order and then buying shares for a house account before filling the order, profiting from the run-up caused by a buy from a larger institutional client.

It’s more bad news for Merrill Lynch, which has been rocked by subprime write-downs and regulatory inquiries into its accounting. It could also be indicative of internal controls problems at the company.

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This entry was posted on Monday, January 14th, 2008 at 4:41 pm and is filed under Stocks Money News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.