According to a newly released Bloomberg article, four days before Merrill Lynch & Co. (ML) stopped supporting the auction-rate securities market and left and thousands of individual investors stuck with securities they couldn’t sell, the firm’s analysts recommended clients buy the toxic paper.
For example, one analyst wrote in a Feb. 8, 2008 research note “Reports of the imminent demise of the auction market seem to be greatly exaggerated, again.” The same analyst also remarked “we continue to be impressed by the auction market’s resiliency.”
The remarks show Merrill’s researchers were “co-opted”during a seven-month drive by the New York-based firm’s sales force to prevent a meltdown in the $330 billion market, Massachusetts Secretary of State William Galvin alleged yesterday in an administrative complaint accusing ML of faud. See July 31,2008 Boston.com article
According to Galvin, “Research analysts routinely soft-pedaled significant negative
events affecting liquidity in the auction markets,” he said in the complaint. At the same time, managers knew “the auction markets were not functioning properly and were in fact in significant danger of collapsing,” he said. ML has denied that its analysts acted improperly in recommending auction-rate securities (ARS).
ARS’s are long-term bonds or preferred shares with interest rates adjusted typically every seven, 28 or 35 days through a dealer-run bidding process, providing them with the characteristics of money-market investments. Firms historically supported the auctions, without contractual obligation, when demand waned. Merrill is the second bank to face a complaint by Galvin after brokers stopped supporting the auctions in mid-February as losses from securities tied to subprime mortgages mounted. Massachusetts last month filed a complaint against UBS, Switzerland’s biggest bank.
If you have lost money or had assets frozen in an ARS purchased from Merrill Lynch or UBS, contact our office for a free case evaluation.