Merrill Lynch accused of pocketing $3.3 million from insider trading

By Park Jin-hai

A local lawmaker said Sunday that that Merrill Lynch pocketed 3.4 billion won from insider trading while consulting for the Korea National Oil Corp.(KNOC) eight years ago as an investor advisor on the purchase of Canadian oil producer, Harvest Operations.

Hong Young-pyo, a lawmaker of the main opposition New Politics Alliance for Democracy, claims that Barclays Global Investors (BGI), a Merrill Lynch affiliate, purchased nearly 1 million Harvest shares over the 20 days prior to KNOC’s purchase of the Canadian oil producer on Oct. 21, 2009, despite its poor financial record.

“In the first half of 2009, BGI like other financial institutions has been selling Harvest share en mass. However, as the KNOC deal started to take shape in July that year, it abruptly changed its investing pattern, buying up shares,” said Chung Han-mo, the lawmaker’s aide said during an interview with The Korea Times.

He claims that Merrill Lynch not only gave the bad investment advice, making KNOC suffer a loss of nearly $1.2 billion from its failed investment in Harvest Operations and its money losing North Atlantic Refining Limited (NARL), it also took profits from inside trading through its affiliate BGI.

“BGI sold about 1 million Harvest shares previously, but later bought them back as if it knew there was a favorable condition for the company in the market,” added the Chung.

He added that the Harvest Operations, which was not on the top investment recommend list when it was designated as the investor advisor, was placed higher on the list in just three days.

According to the Harvest’s financial disclosure, it posted 57 percent sales drop in the second quarter of 2009, compared with a year earlier, and inked 150 billion won operating loss.

BGI purchased 170,000 Harvest shares in July, 2009, and nearly 950,000 shares in October.

Hong said the KNOC should bring the case to the U.S. court and claim compensations against BGI for inside trading.

KNOC suffered a loss of nearly $1.2 billion from its failed investment in Harvest Operations NARL refinery, according to the Board of Audit and Inspection.

The loss was incurred after KNOC acquired NARL for the inflated price of $1.22 billion in 2009, although its fair value was only $941 million. KNOC sold the refinery to a New York-based merchant bank for just $3.5 million last year.

KNOC’s acquisition of Harvest has been used as an example of the “failed energy diplomacy” conducted by the Lee Myung-bak administration.

Merrill Lynch also became part of the focus of the prosecution's investigation, after it was found that NARL's market value was exaggerated way above its actual standing.

It is estimated to have pocketed $11 million ― a $7.67 million bonus from the Harvest deal, and $3.3 million from insider trading.