Merrill Accused of Wrongdoing in MA Town’s Investments

Accusations of mismanagement have been leveled against Merrill Lynch by government clients in a second state, the Wall Street Journal reported.

Springfield, Massachusetts, officials contend that Merrill violated state law by not properly telling them what investments it was making on their behalf after finding out the financial services firm had put their money into risky positions backed by subprime mortgages, the newspaper said. A key Springfield investment had lost more than 90% of its value.

The city’s stake in three collateralized debt obligations (CDO) valued at $13.9 million as recently as July and is now valued at $1.2 million, according to Merrill’s account statements, the Journal reported.

Springfield officials say Merrill only eventually informed them about the CDO sales by sending them a document issued by Centre Square, a Cayman Islands-based company. That document revealed that some of the CDOs could be backed by subprime mortgages and might not be easy to sell, according to the news report.

Merrill spokesman Mark Herr said the company did not provide Springfield officials with the CDO’s prospectus last spring when they were purchased because the Springfield transaction was after the initial offering. Under those circumstances, “there was no requirement for a prospectus at the time of the purchase,” he told the Journal.

For its part, the city is taking a hard line position. “I believe Merrill Lynch is responsible and will be obliged, in the end, to restore the city’s money,” Christopher Gabrieli, chairman of the Springfield Finance Control Board, which oversees the city’s finances, said in the news report.

City finance officials argue that state law limits cities to investing in safe, short-term, and easily tradable investments.

According to the news report, state securities regulators are probing Merrill Lynch about the sale, asking questions about the timing and whether the brokerage firm did enough to warn the city about the risks. The secretary of state has subpoenaed brokers responsible for the sales. The Massachusetts attorney general is also conducting an investigation.