Merrill deals may be under scrutiny

LONDON (CNNMoney.com) -- Merrill Lynch & Co. Inc. may have engaged in transactions with hedge funds to to buy time before reporting losses tied to risky mortgage securities, according to a published report.

The Wall Street Journal said the Securities and Exchange Commission is likely to investigate the deals to see whether the bank disclosed enough information about its mortgage exposure to investors during the summer.

One transaction the newspaper reported involved a hedge fund buying $1 billion in commercial paper containing mortgages issued by an entity related to Merrill. The hedge fund was guaranteed a minimum return and had the right to sell the debt back to Merrill after one year, the report said.

According to the newspaper, Merrill (Charts, Fortune 500) may have been required to take a writedown if the entity issuing the paper wasn't able to sell it to other investors.

A Merrill spokeswoman told the paper: "We don't comment on specific transactions and we are confident in the appropriateness of our marks."

Merrill took a massive $7.9 billion writedown related to its mortgage assets in the third quarter. That huge loss, which was much bigger than expected, led to the ouster of CEO Stanley O'Neal and also has fueled concerns that the firm and other Wall Street banks may report further mortgage losses.