Merrill denies insider trading and seeks $9m from its accusers

As revealed in BusinessDay on Saturday, David Waterhouse of the Sydney racing family, alleges that executives at Merrill Lynch knew the bank would make an "awful" announcement in New York on January 18 last year and used that information to short-sell $55 million worth of shares in blue-chip Australian companies, including BHP Billiton and Commonwealth Bank, that would be affected by the news.

In a statement issued yesterday, the investment bank said: "Merrill Lynch completely rejects the allegations of insider trading which have been the subject of recent press coverage. Merrill Lynch has already commenced proceedings to recover in excess of $9 million owed to it by How Trading and David Waterhouse. These proceedings are set down for trial next Tuesday."

A source at the Australian Securities and Investments Commission said the insider trading and short-selling allegations made against Merrill Lynch were on the agenda at the weekly board meeting of the corporate regulator, held in Sydney yesterday.

Neither the ASX nor ASIC would make an official statement.

Mr Waterhouse made his insider-trading allegation in a witness statement provided to the Supreme Court of Victoria.

In that statement, which BusinessDay has seen, Mr Waterhouse says a Merrill Lynch executive told him about the impending dire news out of New York.

According to the statement, Mr Waterhouse told one Merrill Lynch executive: "I'm scared what you're saying, I could get into big trouble, I would not want the exposure and I don't think it's legal anyway ... as it sounds like insider trading or heavy losses, I do not want to be rolled up into that."

According to the statement, the Merrill Lynch executive replied: "Good point, I'm also concerned about insider trading due especially to our results coming out on Thursday night. However, David, we are now in control of the account and will be buying back at our own discretion as you have lost control of the account."

Four days after that meeting at the Merrill Lynch office in Sydney, the company announced a $US9.83 billion fourth-quarter loss in New York, including a $US16.7 billion write-down associated with subprime mortgage losses. Sharemarkets and bank stocks around the world tumbled on the news.