State Sues Merrill Lynch For Fraud In The Sale Of Auction-Rate Securities


Today, Massachusetts securities regulators charged Merrill Lynch with fraud in the sale of auction-rate securities. The State’s complaint asserts that the major Wall Street firm was pushing its brokers to sell auction-rate securities without making the proper disclosures to investors for months after the firm knew that the market for auction-rate securities was on the brink of collapse. The states of Massachusetts, New York and Texas had previously filed similar claims against UBS.

According to published reports, various regulatory authorities are continuing to investigate other Wall Street firms over their auction-rate securities activities. Other firms that are currently under investigation by a task force of approximately 13 states include Wachovia and Bank of America Corp. In addition, the Attorney General for the State of New York, who opted out of the task force, has subpoenaed records from 18 institutions including Citigroup, J.P. Morgan Chase & Co. and Goldman Sachs Group. Additional firms that have been mentioned in the auction-rate securities market fiasco are Lehman Brothers and Bear Stearns Cos. The SEC and Financial Industry Regulatory Authority are also investigating the sales practices and disclosures firms made to investors with respect to auction-rate securities.

The auction-rate securities market collapsed in February of this year, leaving investors holding securities they had been led to believe were as good as cash. The allegations against Merrill Lynch allege that the firm knew that the market for these securities was in trouble in the summer of 2007 and yet continued to promote them to investors as “safe, liquid cash alternatives” without disclosing an array of negative facts about auction-rate securities. Merrill Lynch served as the underwriter for the securities it was selling and had begun to prop up the market by purchasing some of the securities at auction so that the auctions would not fail. Beginning in the late summer of 2007 and continuing thereafter, Merrill Lynch’s inventory of auction-rate securities grew rapidly because of deteriorating market conditions. As a result, Merrill Lynch began an aggressive marketing campaign to sell these troubled securities to individual investors without disclosing Merrill’s involvement in propping up the market by bidding on the auctions and without disclosing the troubles that existed in the auction-rate markets.

The Massachusetts complaint also alleges that Merrill Lynch actually exerted undue pressure on its own research department to assist the fraudulent effort to unload these problem securities. The complaint also points out that Merrill Lynch generated $90 million during 2006 and 2007 by virtue of its activities in auction-rate securities.

Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing institutional and individual investors in auction-rate securities cases. For further information, please contact us.