UNITED STATES OF AMERICA

BEFORE THE

COMMODITY FUTURES TRADING COMMISSION

�

ORDER MAKING FINDINGS AND IMPOSING REMEDIAL SANCTIONS

By the spring of 1994, the manipulators were in need of financing to accommodate the extremely large purported "hedge" positions that they planned to assume in furtherance of their manipulative scheme.1 A Managing Director of Merrill (B&D) proposed that Sumitomo open an account in which Sumitomo and the other manipulators would have trading authority, but which would be backed by Sumitomo's line of credit. The account was designated the Sumitomo "B" account.

With the "B" account in place, the manipulators began to purchase LME forward contracts. By the end of September 1995, the forward position in the "B" account totaled approximately 780,000 metric tons. Together with Sumitomo's other long forward positions at Merrill (B&D) and other brokers, the manipulators held nearly 2 million metric tons of LME forward contracts and controlled approximately one-half of LME warehouse stocks. ²

To unwind their dominant position at a profit, the manipulators agreed in September 1995 that they would take delivery on some of their long copper forward position and, thus, drive prices to artificially high levels. Accordingly, they devised a false cover story which was intended to deceive the marketplace and market regulators into believing that the taking of delivery of additional copper warrants was driven by legitimate commercial considerations. Pursuant to this plan, the manipulators falsely informed brokers, including Merrill (B&D), that the manipulators needed to accumulate a substantial amount of copper to meet their physical obligations and intended to "sift" warrants for the purpose of finding premium grade and location material for the purpose of delivering the copper to Sumitomo pursuant to their copper supply contracts. In fact, however, the manipulators concocted the story to obscure their real motivation which was to control the deliverable supply of LME warrants in order to drive prices and spreads upward.

2. Merrill (B&D) and Merrill International Provided Financing to the Manipulators

Although some representatives of the Merrill Lynch respondents were suspicious of the manipulators' purported need for taking delivery, employees of Merrill Lynch entities approved two methods of financing the manipulators' warrant-taking operation. In mid-October 1995, when the manipulators began to take delivery of LME warrants in the "B" account, Merrill (B&D) and Merrill International entered into what came to be known as "buy-sell back" financing trades. In these trades, "B" account positions coming to prompt, on which the manipulators intended to take delivery, were purchased by Merrill (B&D) and simultaneously sold back to the "B" account in a position prompting on the following day. The "B" account paid Merrill (B&D) a price differential on these spread trades of $.70 per metric ton, which reflected the cost of carry per day for copper, during the fourth quarter of 1995. Merrill (B&D) paid the London Clearing House for the warrants, and, therefore, Merrill (B&D) actually owned the warrants until they reverted back to the "B" account the next day on the sale leg of the spread trade. The manipulators at times exercised control over virtually all LME warehouse stocks through the over one-half billion dollars in financing provided by the Merrill Lynch respondents.

The second method of financing approved by the Merrill Lynch respondents was a $100 million Commodity Inventory Purchase Obligation ("CIPO") credit line. The purpose of the CIPO, according to the manipulators, was to finance the acquisition of the premium grade and location copper which was selected through the purported "sifting" of the warrants received on delivery and which was to be shipped to Sumitomo. During the fourth quarter of 1995, Merrill (B&D) and Merrill International were aware that the CIPO financing was never used.

3. The Knowledge of Merrill (B&D) and Merrill International

During the period that Merrill (B&D) and Merrill International provided the "buy-sell back" financing and agreed to provide the CIPO financing to the manipulators, certain responsible Merrill (B&D) and Merrill International personnel correctly concluded that the manipulators' warrant-taking operation was not motivated by any genuine commercial need. At a minimum certain responsible Merrill (B&D) and Merrill International personnel knew:

� By November 6, 1995, the manipulators owned over 70% of the copper in the LME warehouses;

� The manipulators were withholding the vast majority of their copper warrants from the market;

� The manipulators were not engaged in sifting or customer delivery visible to Merrill (B&D) and Merrill International that supported their purported commercial needs;

� The manipulators had not drawn down the CIPO financing;

� A representative of the manipulators had discussed with certain responsible Merrill (B&D) personnel a strategy whereby the vast majority of the manipulators' position would be withheld from the market;

� Merrill (B&D) accepted from the manipulators and entered scale price orders in the LME market at increasing price levels above the prevailing market price; and

� The price of copper was higher than it would have been absent the manipulators' activities.

Notwithstanding the foregoing knowledge, Merrill (B&D), through certain responsible personnel, discussed with the manipulators and executed trading strategies that the manipulators intended to, and did, increase copper prices. In addition, Merrill (B&D) continued to execute "buy-sell back" financing trades with the "B" account and to pay for delivery of additional warrants. By November 24, 1995, the manipulators controlled 8098 warrants through the Sumitomo accounts at Merrill Lynch, or 93 percent of the 8666 total warrants in LME warehouses.

4. Merrill (B&D) Profited from the Manipulation

Merrill B&D profited as copper prices rose. Merrill (B&D) owned the copper warrants that it financed through the "buy-sell back" transactions from approximately 12:30 p.m. London time until the beginning of trading the next day. Merrill (B&D) took advantage of this position by lending for its proprietary account a portion of these warrants at the increased spread price differentials. Thus, during the manipulation period, Merrill (B&D) realized profits from the increased backwardation in spreads created by the manipulators' activities.

D. LEGAL DISCUSSION

Under Section 13(a) of the Act, an individual or entity who knowingly participates in an unlawful venture, participates in it as something he wishes to bring about, and seeks by his actions to make it successful is liable as an aider and abettor. In re Lincolnwood Commodities, Inc. of California, [1982-84 Transfer Binder] Comm. Fut. L. Rep. (CCH) �21,986 (CFTC Jan 31, 1984); In re Richardson Securities, Inc., Comm. Fut. L. Rep. (CCH) �21,145 (CFTC Jan 27, 1981).

Under Sections 6(c), 6(d) and 9(a)(2) of the Act, an individual or entity is liable for market manipulation where that individual or entity has the ability to influence market prices; specifically intends to influence prices; artificial prices exist; and the individual or entity caused the artificial prices. In re Cox, [1986-1987 Transfer Binder] Comm. Fut. L. Rep. (CCH) �

23,786 at 34,061 (CFTC July 15, 1987). All of the elements of market manipulation are present in this case. The manipulators had the ability to influence market prices and spreads; they specifically intended to create artificial prices and spreads; artificial prices and spreads existed during the period; and the manipulators caused the artificial prices and spreads. As a consequence, therefore, a manipulation of the copper market in violation of Sections 6(c), 6(d) and 9(a) of the Act took place during the fourth quarter of 1995.

Merrill (B&D) and Merrill International provided the financial wherewithal and trading assistance with which the manipulators manipulated the market. During the fourth quarter of 1995, Merrill (B&D) and Merrill International financed the manipulators' acquisition of virtually all LME warrants. In addition, Merrill Lynch provided the trading facilities and credit through which the manipulators maintained a dominant position in maturing LME futures contracts and warrants. Merrill (B&D) provided trading advice to the manipulators that the manipulators used in the execution of the manipulators' strategy of withholding their copper from the market. During this period, Merrill (B&D) and Merrill International knew, through certain responsible personnel, that, among other things, the manipulators owned most LME copper warrants, were withholding such copper warrants from the market, were not engaged in sifting or customer delivery visible to Merrill (B&D) and Merrill International that supported their purported commercial needs, and were entering scale price orders, and that the price of copper was higher than it would have been absent these activities. Even though the manipulators misrepresented to them that they needed the copper to meet physical requirements and for sifting, Merrill (B&D) and Merrill International correctly concluded, through certain responsible personnel, that the manipulators' warrant-taking operation was not motivated by any genuine commercial need. The Commission finds that Merrill (B&D) and Merrill International therefore possessed the requisite knowledge and intent to find that they aided and abetted the manipulators' violations. In addition, Merrill (B&D) and Merrill International benefited from providing financing, trading facilities, and credit to the manipulators, and earning profits through proprietary trading. Therefore, Merrill (B&D) and Merrill International aided and abetted violations of Sections 6(c), 6(d) and 9(a)(2) of the Act.

IV.

FINDINGS OF VIOLATIONS

Based on the foregoing, the Commission finds that Merrill Lynch, Pierce, Fenner & Smith (Brokers & Dealers), Ltd. and Merrill Lynch International, Inc. aided and abetted violations of Sections 6(c), 6(d) and 9(a)(2) of the Act, as amended, 7 U.S.C. ��9, 15 and 13(a)(2), pursuant to Section 13(a) of the Act, as amended, 7 U.S.C. � 13c(a).

V.

OFFER OF SETTLEMENT

Merrill Lynch & Co., Inc., Merrill Lynch, Pierce, Fenner & Smith (Brokers & Dealers), Ltd., and Merrill Lynch International, Inc. have submitted an Offer of Settlement in which, without admitting or denying the allegations or the findings herein, they: acknowledge service of the Complaint; admit the Commission's jurisdiction with respect to all matters set forth in the Complaint and the Order; waive a hearing, all post-hearing procedures, judicial review by any court, any objection to the staff's participation in the Commission's consideration of the Offer, all claims which they may possess under the Equal Access to Justice Act, 5 U.S.C. �504 (1994) and 28 U.S.C. �2412 (1994), as amended by Pub. L. No. 104-121, ��231-32, 110 Stat. 847, and Part 148 of the Commission Regulations, 17 C.F.R. ��148.1 et seq., relating to, or arising from this action; and any claim of Double Jeopardy based on the institution of this proceeding or the entry of any order imposing a civil monetary penalty or other relief; stipulate that the record on which a Commission Order accepting this Offer may be entered shall consist solely of the Complaint and the Order including the findings in the Order to which Merrill Lynch, Pierce, Fenner & Smith (Brokers & Dealers), Ltd. and Merrill Lynch International, Inc. have consented in the Offer; and consent to the Commission's issuance of this Order, in which the Commission makes findings, including findings that Merrill Lynch, Pierce, Fenner & Smith (Brokers & Dealers), Ltd. and Merrill Lynch International, Inc. aided and abetted violations of �� 6(c), 6(d) and 9(a)(2) of the Act, and orders that Merrill Lynch, Pierce, Fenner & Smith (Brokers & Dealers), Ltd. and Merrill Lynch International, Inc. cease and desist from violating the provisions of the Act they have been found to have violated, that they pay a civil monetary penalty in the amount of fifteen million dollars ($15,000,000 USD) within ten (10) business days of entry of the Order, in the manner set forth in this order and that Merrill Lynch & Co., Inc., Merrill Lynch, Pierce, Fenner & Smith (Brokers & Dealers), Ltd., and Merrill Lynch International, Inc. comply with their undertakings set forth in the Offer.

VI.

ORDER

Accordingly, IT IS HEREBY ORDERED THAT:

1. Merrill Lynch, Pierce, Fenner & Smith (Brokers & Dealers), Ltd. and Merrill Lynch International, Inc. cease and desist from violating and aiding and abetting violations of �� 6(c), 6(d) and 9(a)(2) of the Act;

2. Merrill Lynch, Pierce, Fenner & Smith (Brokers & Dealers), Ltd. and Merrill Lynch International, Inc. shall pay a total amount of Fifteen Million Dollars ($15,000,000 USD), within ten (10) business days of the entry of the Order, by electronic funds transfer to the account of the Commission at the United States Department of the Treasury. Such payment shall be made in a manner authorized by the Commission and in accordance with the United States Treasury regulations and shall be accompanied by a letter that identifies Merrill Lynch, Pierce, Fenner & Smith (Brokers & Dealers), Ltd. and Merrill Lynch International, Inc. and the name of this proceeding. A copy of the cover letter and proof of payment to the United States Treasury shall be simultaneously transmitted to Phyllis Cela, the Acting Director of the Division of Enforcement ("Division") of the Commission. If payment is not made in accordance with the requirements of this paragraph, this Order shall be vacated and the proceeding reinstated as to the Merrill Lynch Respondents.

3. The Complaint as to Merrill Lynch & Co., Inc. is hereby dismissed;

4. Merrill Lynch & Co., Inc., Merrill Lynch, Pierce, Fenner & Smith (Brokers & Dealers), Ltd., and Merrill Lynch International, Inc. shall comply with the following undertakings:

a. the Merrill Lynch Respondents shall cooperate fully with the Commission and its staff, including the Division, in this proceeding and any investigation, civil litigation, or administrative matter related to the subject matter of this proceeding. The Merrill Lynch Respondents agree that this undertaking includes the specified Merrill Lynch Respondents in this proceeding and their subsidiaries and affiliates, as well as all other subsidiaries and affiliates of Merrill Lynch (collectively, "Merrill Lynch"). As part of such cooperation, the Merrill Lynch Respondents agree to comply fully, promptly, and truthfully to any inquiries or requests for information including but not limited to (1) requests for authentication of documents; (2) requests for any documents within Merrill Lynch's possession, custody, or control, including inspection and copying of documents; (3) requests for agents and employees of Merrill Lynch to testify completely and truthfully to the Division; (4) requests to produce any current (as of the time of the request) officer, director, or employee of Merrill Lynch, regardless of the employee's location, for interviews, depositions, or testimony, and to provide testimony or assistance at any trial related to the subject matter of this proceeding; and (5) requests for assistance in locating and contacting any prior (as of the time of the request) officer, director, or employee of Merrill Lynch. The Merrill Lynch Respondents designate Barry J. Mandel to receive all requests for information pursuant to this undertaking. Should the Merrill Lynch Respondents seek to change the designated person to receive such requests, notice shall be given to the Division of such intention 14 days before it occurs. Any person designated to receive such request shall be located in the United States; and

b. the Merrill Lynch Respondents shall not take any action or make any public statement denying, directly or indirectly, any allegation in the Complaint or statement in the Order or creating, or tending to create, the impression that the Complaint or Order is without factual basis; provided, however, that nothing in this provision shall affect (i) the Merrill Lynch Respondents' testimonial obligations; or (ii) right to take factual or legal positions relating to any proceeding to which the Commission is not a party. The Merrill Lynch Respondents understand and agree that the Commission's acceptance of their Offer is conditioned upon its compliance with this agreement in statements made by them and by agents, attorneys, and employees acting under their authority and control. The Merrill Lynch Respondents will undertake all steps necessary to assure that all of their agents, attorneys, and employees understand and comply with this agreement.

By the Commission.

NOTES:

2 An LME copper futures contract calls for delivery of 25 metric tons of Grade A electrolytic copper. Separate contracts for delivery dates, referred to as "prompt" dates, are traded on the LME for each business day out to three months in the future, and for additional dates out to 27 months.