Just when you thought the auction-rate securities scandal had reached a peak, another Wall Street investment bank is accused of putting its own interests before investors. The top securities regulator in Massachusetts is now accusing Merrill Lynch of securities fraud, claiming that the New York-based investment firm promoted and sold auction-rate notes to investors while downplaying the marketâ€™s risks.
Massachusetts Secretary of State William Galvin charges that Merrill Lynch knew several months prior to auction marketâ€™s collapse in February that auction-rate securities were not functioning as they should, yet the companyâ€™s sales force ramped up efforts to unload the ARS on investors.
The complaint also alleges that Merrill Lynch censored research that foreshadowed problems in the auction market, and instead made sure investors received materials endorsing the safety of auction-rate notes.
As with the complaint Galvin filed against UBS last month over its sales of auction-rate securities, e-mails also are an integral part of Merrill Lynchâ€™s legal troubles. The Massachusetts complaint cites a personal e-mail written by a Merrill Lynch executive on Nov. 19, which reads: â€œMarket is collapsing. No more $2k dinners at CRU.â€
On February 7, 2008, Merrill Lynch Research Analyst Kevin Conery told financial advisers that auction-rate securities were a â€œgood, conservative, reasonable investment.â€ Five short days later, Merrill Lynch pulled out of the auction-rate market entirely.
The complaint further alleges that Merrill Lynch created a â€œfalse impressionâ€ that deep pools of liquidity were available in the auction market by submitting support bids to prop it up.
Auction-rate securities are long-term bonds with interest rates that reset every seven, 14, 28 or 35 days. Prior to the auction market seizing up in February, municipalities, student-loan companies and closed-end mutual funds had sold about $330 billion of auction-rate securities. Once buyers fled the market, however, auctions failed, freezing billions of dollars of investments held by individuals and institutions.
The Massachusetts complaint against Merrill Lynch wants it to make good on the sales of frozen auction-rate notes, as well as pay restitution to investors who were forced to sell their securities at a loss. The complaint also would impose an unspecified fine.
â€œThis company was aggressively selling the securities to investors and its auction desk was censoring the research analysts to make sure they downplayed market risks,â€ said Massachusetts Secretary of State William Galvin in a statement. â€œThey knew the auction markets were in trouble, but the investors were the last to know.â€
Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.Â