Corporate & Securities Law

The Massachusetts securities regulator has accused Merrill Lynch of defrauding auction-rate investors.  According to Bloomberg:

Massachusetts Secretary of State William Galvin accused Merrill Lynch & Co. of fraud, claiming the investment bank sold auction-rate securities to investors while misleading them about the market's stability.

Merrill, based in New York, also "co-opted" its research department to help sell the securities, Galvin said in a statement.  The state's administrative claim asked the third-largest U.S. securities firm to "make good" on sales of now-frozen holdings, compensate investors who sold their bonds or shares at a loss and pay an unspecified fine.

"This company was aggressively selling" the securities "to investors and its auction desk was censoring the research analysts to make sure they downplayed" market risks, Galvin said in the statement.  "They knew the auction markets were in trouble, but the investors were the last to know."

Massachusetts filed a related complaint against UBS, Switzerland's biggest bank, in June after brokers abandoned their role as buyers of last resort for auction-rate securities, allowing the market to freeze.  A related investigation of Bank of America Corp. is "still going on," said Brian McNiff, Galvin's spokesman.

Merrill decided to stop supporting bids with its own money five days after one of its analysts told financial advisers the bonds represented "a good, conservative, reasonable investment," Galvin said. 

The securities firm, whose market value trails Goldman Sachs Group and Morgan Stanley, made about $90 million in profit during 2006 and 2007 from its auction-rate program, Galvin said in the statement.

"Time after time, when confronted with conflicts of interest, Merrill Lynch was consistent in that it placed its own interests ahead of its investor clients," according to the complaint.

SNSFE attorneys continue to assist investors as they unravel this mess with respect to auction-rate securities.

Source:  Bloomberg