Mass Charges Merrill With Fraud In Auction-Rate Sec Sale

By Daniel | July 31, 2008

Last Update: 7/31/2008 10:46:11 AM

DOW JONES NEWSWIRES

The Massachusetts Secretary of the Commonwealth charged Merrill Lynch & Co. (MER)
with fraud in pushing the sale of auction-rate securities while “misstating the
stability of the auction market itself.”

“This company was aggressively selling ARS to investors and its auction desk was
censoring the research analysts to make sure they downplayed ARS market risks in
research reports up to the day Merrill pulled the plug on its auctions,”
Secretary William Galvin said. “They knew the auction markets were in trouble,
but the investors were the last to know.”

The complaint also alleges Merrill co-opted its research department to help sell
the securities and seeks to order the brokerage to “make good” on the sales of
now-frozen securities and make restitution to investors who sold at less than
par.

Merrill Lynch had no immediate comment.

Earlier this week, units of UBS AG (UBS) disclosed they will pay $4.4 million to
settle allegations from the state’s attorney general’s office that the bank
misled cities and government agencies into investing in the troubled investment
products. The payment will come in addition to the roughly $35 million that UBS
agreed to pay in May to Massachusetts municipalities and agencies. The Swiss bank
didn’t admit or deny wrongdoing in the settlement, which it said “represents the
final step in the resolution of this matter with the Massachusetts attorney
general.”

New York has also filed charges against UBS.

Auction-rate securities - issued by municipalities, student-loan companies,
charitable organizations and others - are long-term securities that Wall Street
engineered to have short-term features. Their interest rates reset at weekly or
monthly auctions run by Wall Street firms. The firms promised individual
investors and corporate clients that the frequent auctions made these securities
as safe and liquid as cash because they would always be easy to sell quickly.

Thursday’s complaint versus Merrill alleges the company had known for several
months that the auction markets faced significant danger of collapsing.

In a personal email last November, one executive allegedly wrote, “The market is
collapsing. No more $2k dinners at CRU,” referring to a Manhattan restaurant. Yet
about three months later, a research analyst told financial advisers the auction
business represented a “good, conservative and reasonable investment.”

Only five days later, Merrill decided to stop supporting the auction-rate
securities, and most of the auctions failed the next day.

The complaint alleges Merrill Lynch made about $90 million from the auction
market in 2006 and 2007.

Earlier this week, Merrill agreed to sell more than $30 billion in toxic
mortgage-related assets at a steep loss, hoping to purge its balance sheet of
problems that continue to plague the giant brokerage firm.

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