As reported in the Wall Street Journal, and cited on this blog, Merrill reimbursed Springfield, MA for losses on CDOs that were unsuitable investments (the city had made clear it only wanted low-risk products).
As Bloomberg tells us, that was not sufficient to halt a suit by the Massachusetts sttorney general’s office which had been investigating the transactions.
Merrill Lynch & Co. was accused of securities fraud by Massachusetts regulators for selling the city of Springfield $13.9 million in collateralized debt obligations that lost 91 percent of their value.
Merrill and two of its brokers sold “unsuitable” securities to Springfield last year after the firm was hired to help manage the city’s short-term investments, Massachusetts Secretary of State William Galvin said in a complaint filed today. Galvin also alleges that Merrill was hired because one of the brokers was friends with a state official overseeing the city’s finances.
“Merrill was supposed to invest in only safe money-market like investments,” Galvin said in the lawsuit.
The suit was filed a day after Merrill agreed to reimburse Springfield $13.9 million for the losses, saying its brokers bought the CDOs without the city’s “express permission.” Galvin’s office last month subpoenaed documents from Merrill related to the sale and requested the two brokers, Carl Kipper and Manuel Choy, appear before state securities regulators.
“We are puzzled by this suit,” said Mark Herr, a Merrill spokesman, in a statement. “We have been cooperating with Mr. Galvin’s office in its inquiry.”…
Merrill, the world’s largest brokerage, bought CDOs for Springfield between April and June last year after it was hired to help manage the city’s cash. It didn’t give the city a detailed description of the investment until November, when it sent officials a private placement memorandum on Centre Square CDO, one of the series of securities it bought.
“This is the only record of any prospectus being received,” Edward Pikula, the Springfield solicitor, said. The city, the third-largest in Massachusetts, never received any documents on S Coast FD V CDO or TABS CDO, the other two series of securities that Merrill bought for it, Pikula said.