Secretary William Galvin’s complaint “charges the firm with separate counts of fraud and dishonest and unethical conduct for creating and implementing a sales and marketing scheme which significantly misstates not only the nature of auction rate securities (ARS), but also the overall stability of the auction market, resulting in thousands of investors being abandoned with illiquid investments.:”
“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,” Galvin told the Wall Street Journal. “They knew the auction markets were in trouble, but the investors were the last to know.”
The Massachusetts charges allege Merrill had known for several months that the auction markets faced significant danger of collapsing. The complaint alleges Merrill Lynch made about $90 million from the auction market in 2006 and 2007.
Earlier this week, units of UBS AG disclosed they will pay $4.4 million to settle allegations from the Massachusetts attorney general’s office that the bank misled cities and government agencies into investing in the ARS market (See UBS Plans to Buy Back Auction-Rate Securities).
Massachusetts Attorney General Martha Coakley alleged that a local broker working for UBS misled cities and government agencies into thinking that such securities were as liquid as cash, a legal requirement for government investments in Massachusetts (See UBS Benches Fixed Income Head Amid Auction-Rate Probes).
New York has also filed charges against UBS (See NY Next to Target UBS).
More information about the latest Massachusetts charges against Merrill is available here.