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Complete 2 pages APA formatted article: Current Ethical Issue in Business. Merrill Lynch was investigated by the SEC in 2007 for misusing their hedge funds. The misuse was borderline fraud, since the bad mortgage debt was being put into hedge fund. Then the hedge funds were guaranteed to be bought back at a slightly higher price in one year. The reason for this hedge fund misuse was to hide bad debt making the company seem more successful to investors. This was done in an effort to seem more reliable to investors. The reasoning was not bad, but the actions were unethical.

Hedge funds are funded by investors that want to take risks. When Merrill Lynch put bad mortgages in hedge funds than sold them for a year with the promise of a return, the logic was the investors knew the risk. Lita Epstein (2007) explains:

Initial reports indicate Merrill Lynch sold commercial paper to hedge funds with promises of buying it back a year later and guaranteeing the hedge funds a minimum return.

The guaranteeing of a minimum return was a promise Merrill Lynch could not keep. The market became worse instead of better.

Merrill Lynch had hidden billions of dollars in the hedge funds. The SEC became suspicious. In the end:

Merrill investors had no idea how bad its situation was until it finally came clean about its losses and took a $7.9 billion write-down on these risky securities, one of Wall Streets largest write-downs ever, plus another $463 million write-down of deal-related lending commitments for a total of $8.4 billion. (Epstein 2007).

After the investors were made aware of how bad the situation had become more losses came the company’s way. Barr (2007) reports those months after the write down:

“Alpha has essentially disappeared” from the hedge fund industry, said Ebens, who heads equity derivatives strategy for Merrill in the U.S. Alpha is industry parlance for the extra return.

The hedge funds could not give a minimum return as promised. Merrill Lynch hedge fund investors lost money too.

The result of Merrill Lynch and other hedge fund managers was Congress stepping in with new legislation. This means stricter laws and taxes in the United States and Europe. Merrill Lynch did not learn from their mistakes. Instead of operating in the United States and Europe,

“Bank of America Merrill Lynch is helping to establish more than a dozen hedge funds in Asia as industry regulation grows tougher in America and Europe” (Cooper 2010). Clearly this suggests that Merrill Lynch cares more about a profit than the investor.

The ground rules that manifested this situation were greed, deception, irresponsible borrowing, and portfolio importance. The hedge funds were there to make money by taking risks. The deception of transferring bad mortgages to the hedge fund created the situation. Irresponsible borrowing, a hedge fund can borrow up to thirty percent over their assets, led to defaulted mortgages. Finally the annual financial report had to meet certain goals to be acceptable to stockholders. The truth never had a chance.

Merrill Lynch was guilty of defrauding their stockholders. Although after taking the write down no penalties were given, Merrill Lynch should have learned about the right way to run a hedge fund. The fact that Merrill Lynch wants to operate in Asia should make investors run. This company puts money and success over ethics and investors. This case scenario is not a good example of ethics. Investor should not trust their pennies, much less their dollars with this company.

Bibliography

Barr, A. (2007). Hedge funds have lost alpha, Merrill director says. 17 Apr. 2007.

MarketWatch. Online.

Cooper, G. (2010). Bank of America Merrill Lynch helping set up Asian hedge funds. 18 Jan.

2010. Bobsguide.com. Online.

Epstein, L. (2007). SEC probes Merrill Lynchs hedge fund deals. 2 Nov. 2007. Online.