Merrill Lynch’s investigation by the US regulatory body, the Securities and Exchange Commission (SEC) has been formalised.
The investment bank, which is now also the subject of a criminal investigation, is being scrutinised for accounting procedures surrounding its sub-prime mortgage portfolio.
The examination by the SEC began in October of last year, following accusations that the bank had not fully informed shareholders of the value of its sub-prime investments before announcing its third-quarter results.
At the beginning of October, the bank warned that it faced a writedown of around $5 billion for the third-quarter.
However, on October 24th, Merrill Lynch reported that it had taken a writedown of $8.4 billion in the third-quarter of 2007, resulting in the largest quarterly loss ($2.2 billion) in the bank’s 93 years of business.
The formalisation of the SEC investigation gives the regulator the power to subpoena both documents and employees.
If instances of misconduct are exposed, the bank could face huge fines and employees could be banned from working in the financial services sector.
Meanwhile, Federal prosecutors have also begun preliminary investigations into Merrill’s sub-prime valuations.
In related new, the city of Cleveland in Ohio is seeking damages from 21 Wall Street firms, claiming that they encouraged mortgage lenders to sell loans to people who could not afford them.