Down under, Merrill Lynch and one of its subsidiaries face allegations from a Sydney businessman that they engaged in what would reportedly be “the biggest case of insider trading in [Australia's] corporate history.”

The allegations against Merrill Lynch by David Waterhouse relate to certain short-selling by Merrill Lynch of $55 million of Australian stocks in January 2008. Waterhouse claims that on January 14, 2008, Merrill’s Berndale Securities subsidiary seized control of an account Waterhouse held called “How Trading” because it had breached its agreed margin call levels.  According to the Sydney Morning Herald, Waterhouse claims that Berndale then used the proceeds of the account through January 17th to short-sell over $55 million of blue-chip Australian shares in major banks and BHP Billiton.

On January 18, Merrill Lynch announced a $US9.83 billion fourth-quarter loss, which led bank stocks around the world to tumble as much as 10%.

A witness statement provided by Waterhouse alleges that Merrill Lynch and Berndale employees were aware that Merrill was about to release the “awful” news when it took the huge short position in bank stocks.  He claims that a Merrill Lynch employee specifically told him

“We wanted you done and dusted before our head office reported their results this week. That time has come and gone. Now we have to do some heavy things straight away today. We will short the hell out of stocks in the market that you have option positions on, maybe up to $100 million, which will more than match your option positions, it’s a great opportunity for you, that we know what is coming this week. With this huge short sale, we will then close the option positions and at the same time buy back the short sale stock, which will support the price on the options.”