Bloomberg News

Conservative Peer Says FSA Ignored Merrill ‘Abuse’

March 03, 2009

A Conservative member of the U.K.’s House of Lords accused Britain’s financial regulator of turning a blind eye to alleged “market abuse” by Merrill Lynch & Co. in 2003.

David James, 71, a restructuring specialist before being appointed a member of parliament’s upper chamber, claimed in the House of Lords late yesterday that the Financial Services Authority ignored claims that New-York-based Merrill had “sucked out” the equity of Greycoat Plc and caused a default by not leaving enough cash to pay the real-estate company’s bondholders.

This was “market and regulatory abuse in any language,” said James. “The purchase of the equity in the market and then the denuding of the company of its assets to the detriment of the quoted bonds left outstanding is an appalling case of market abuse.”

The claims of FSA inaction add to a chorus of Conservative criticisms in the light of the global recession. George Osborne, who speaks for the party on finance, said that the FSA needed to be stripped of its prosecutorial powers because it had proved ineffective. He said a stronger agency to file potential cases of fraud arising out of the financial crisis was needed.

Management Buyout

Vicky Garrod, a spokeswoman for Merrill, now a unit of Charlotte, North Carolina-based Bank of America Corp. (BAC:US), declined to comment. Merrill financed a management buyout of London-based Greycoat in 1999 before selling its stake back to directors in 2003, according to Greycoat’s Web site.

James, who is known in the U.K. as Lord James of Blackheath, said there remained a loss to bondholders in excess of 35 million pounds ($49 million). He said he wrote to former FSA Chairman Callum McCarthy as recently as March 2008 to encourage the FSA to investigate.

“As a matter of policy, we do not comment on investigations,” said Kirsty Clay, an FSA spokeswoman. She declined to comment further on James’s claims.

Ian Mason, a former FSA enforcement director, said this would not be a “a typical example” of market abuse.

“Market abuse in the civil sense normally means insider dealing or making misleading statements,” said Mason, who is now a regulatory lawyer at London-based Barlow Lyde & Gilbert LLP. “Also, the FSA doesn’t say whether it is investigating a company. So, just because he didn’t get a response from them doesn’t mean they weren’t looking at it.”

‘Credible Deterrence’

The FSA said in a statement yesterday that it was committed to achieving “credible deterrence” including sending people to jail for financial crimes.

FSA Chairman Adair Turner told a parliamentary committee in London last week that the agency was pressured by lawmakers to keep regulation “light-touch” in the past.

Turner was vice-chairman of Merrill Lynch Europe from 2000 through 2006. James told the House of Lords yesterday that this in itself didn’t trouble him and that he was sure Turner “would ring-fence himself from any investigation that took place.”

The FSA is particularly sensitive to allegations of conflicts of interest after the departure of James Crosby as its deputy chairman last month. Crosby, who is also the former chief executive officer of HBOS Plc, stepped down from the FSA’s board after a whistleblower claimed he was fired by Crosby for alerting management about risky sales practices at the bank.

To contact the reporters on this story: Caroline Binham in London at cbinham@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net.


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