Merrill Lynch sued over costly stadium bond issue

NEW ORLEANS - The Louisiana Superdome authority has sued Merrill Lynch over a $238 million stadium bond issue that exploded in interest costs after the market for the bonds dried up last year.

The suit, filed by the Louisiana Stadium and Exposition District in state court Wednesday and in federal courts last week, claims the authority was led astray by Merrill Lynch over the potential volatility of the auction-rate bonds if not enough buyers could be found.

Merrill Lynch — without the authority's knowledge — was an active participant in sales for auction rate bonds, which roll over every 7, 14 or 28 days, and had been artificially propping up the market, the suits allege.

After Merrill Lynch stopped participating, buyers for the bonds dried up and the interest rate skyrocketed from about 4 to 12 percent, eventually costing LSED an additional $65,000 per day in interest costs. Auction rate bonds are sold to a bidder willing to accept the lowest interest rate.

"If we had known that Merrill Lynch was participating in these auctions and these auctions eventually failed if Merrill Lynch quit participating, we would not have used this method" of financing, said James Swanson, an attorney for LSED.

The bonds involved refinancing of existing Superdome debt, along with $40 million for post-Hurricane Katrina improvements and $25 million for working capital.

To stop the drain of huge interest costs, the state bought the bonds as an investment of its own late last year. The state has authorized the treasury to hold the bonds through 2009. Although the interest costs will still be several percentage points higher than originally anticipated, it will be less than the maximum interest rate had the bonds stayed on the market, state officials have said.

A spokesman for Charlotte, N.C.-based Bank of America Corp., which acquired Merrill Lynch in September during the financial meltdown, could not be reached for comment late Wednesday.

State Treasurer John Kennedy, who heads the Louisiana Bond Commission, one of the agencies that approved the state purchase of the bonds, declined comment.

The suits allege violation of federal and state securities laws. Swanson said the suits were filed in both courts to protect the LSED's ability to sue. Under normal procedure, judges will eventually decide which court will hear the suit.

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AP reporter Melinda Deslatte in Baton Rouge, La., and Janet McConnaughey in New Orleans contributed to this report.

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