New York to sue Merrill on ARS: attorney general

NEW YORK (Reuters) - New York state will soon take legal action against Merrill Lynch & Co MER.N over auction-rate securities as part of its industrywide investigation into banks that mishandled the risky debt, Attorney General Andrew Cuomo said on Friday.

Cuomo, who has reached settlements with five major banks to buy back a total of $34.8 billion of the securities and pay more than $350 million in fines, said on a conference call with reporters that Merrill will be receiving a letter from his office saying the state is "preparing to commence legal action."

He added that litigation was "imminent" but was not more specific.

A spokesman for Merrill Lynch declined to comment.

Merrill had offered to buy back as much as $12 billion of the debt but has not settled with regulators. In his remarks, Cuomo said his office and Merrill differ over the settlement terms.

"My terms are fairly clear and established because we've done them with a number of institutions," Cuomo said.

The attorney general said his office was also investigating investment bank Goldman Sachs Group Inc (GS.N).

Regulators say brokerages misled investors into believing that auction-rate debt, which has rates that reset in periodic auctions, was safe and the equivalent of cash. Much of the $330 billion market has been frozen since February, when brokerages abandoned their traditional role as buyers of last resort.

(Reporting by Grant McCool, editing by Gerald E. McCormick)