This week's headliner is the Massachusetts Secretary of State suing Merrill Lynch for alleged fraud in selling a mortgage security that went from nearly $14 billion in value to essentially none at all. The alleged party to be defrauded was the City of Springfield.
Even more interesting is the fact that Merrill offered to pay the affected municipality back the purchase price, yet, despite the offer, was still dinged by state for a fraud complaint:
The top securities regulator in Massachusetts accused Merrill Lynch on Friday of defrauding the city of Springfield with subprime-linked investments, casting light on how Wall Street banks sold complex mortgage securities that are now plummeting in value as the housing slump deepens.For a copy of the complaint and exhibit, click here.
William Galvin, the Massachusetts secretary of state, filed a civil fraud complaint against Merrill a day after the firm took the unusual step of agreeing to reimburse Springfield for losses on the investments. Merrill agreed to buy back the securities at their original value, $13.9 million, after determining that its brokers had not been authorized by Springfield to buy the securities on the city’s behalf.
“They are alleging fraud against a municipality, which carries with it much more gravitas than a simple lawsuit,” Mark A. Flessner, a partner at Sonnenschein Nath & Rosenthal in Chicago, said of the complaint. An official in Mr. Galvin’s office said the Springfield case was part of a larger investigation into Merrill’s sales of similar investments to other Massachusetts towns and cities.