Massachusetts sues Merrill over auction securities
BOSTON (Reuters) - Massachusetts sued Merrill Lynch & Co on Thursday, charging it with fraud over its sales of auction-rate securities, as it widened its action against Wall Street firms.
The case, brought by the top state securities regulator William Galvin, charges Merrill with fraud and "dishonest and unethical" conduct for creating and implementing a sales and marketing scheme that authorities said significantly misstated the nature and stability of the auction-rate market.
As a result, thousands of investors were abandoned with illiquid investments, the complaint said.
The state sued two units of Swiss bank UBS AG in June, charging them with fraud over how they sold the securities.
Galvin's spokesman Brian McNiff said Merrill, UBS and Bank of America were subpoenaed earlier this year over their sales of auction-rate securities. The investigation against Bank of America is ongoing, McNiff said.
Merrill officials were not immediately available for comment on the lawsuit.
The $330 billion auction-rate market froze up early this year in the wake of the credit crunch that cost some monoline insurance companies that insured much of the debt their top ratings.
Auctions, which were held periodically to reset interest rates, failed, leaving issuers facing maximum rates as high as 20 percent and investors unable to exit the market.
The securities were sold by tax-exempt debt issuers including municipalities, hospitals, states, as well as by student loan companies and mutual funds, allowing them to obtain lower short-term interest rates for long-term debt.
Wall Street firms, which were supposed to provide liquidity in the market, became overwhelmed by selling pressures and ceased propping up the market with their own bids.
Massachusetts Attorney General Martha Coakley said on Wednesday UBS had reached a settlement with the state over a separate auction-rate probe.
(Reporting by Muralikumar Anantharaman and Karen Pierog; Editing by Brian Moss and James Dalgleish)
