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Merrill Lynch Auction-Rate Securities

Merrill Lynch Charged In Auction-Rate Probe

Massachusetts security regulators have filed fraud charges against Merrill Lynch, one of the world's leading financial management and advisory companies, for allegedly promoting auction-rate securities as “safe” investments when the company knew the auction market had become increasingly unstable.

The administrative complaint filed July 31 by Massachusetts Secretary of State William Galvin states that Merrill Lynch, Pierce, Fenner & Smith, which is the main subsidiary of Merrill Lynch & Co., aggressively sold the securities to investors while downplaying the risks.

This is the second action brought against Wall Street investment banks and securities firms over the sale of auction-rate securities by the Massachusetts Securities Division. In June, regulators filed a similar complaint against UBS Financial Services.

In the civil complaint against Merrill Lynch, Galvin claims the investment firm was aware months in advance of the auction markets actual collapse that auction-rate securities were not selling as they should and that Merrill Lynch continued to aggressively promote the instruments as safe to individual and institutional investors.

As evidence, the complaint references a personal e-mail written by a Merrill Lynch executive on Nov. 19. It reads: “Market is collapsing. No more $2k dinners at CRU [a Manhattan restaurant].”

Galvin's complaint also accusing Merrill Lynch of disregarding research that cited potential problems in the auction market, and instead allowed its sales and trading managers to push for written research touting the safety and high quality of auction-rate securities to be published

Merrill Lynch has denied all of the allegations.

Galvin wants Merrill Lynch to make restitution to investors, as well as pay an undisclosed administrative fine.

“Our principal concern is to make people whole, particularly individuals and small businesses who have been completely upended by this,” Galvin said in a statement.

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