Merrill Lynch To Face Legal Action For Securities Sale

New York Attorney General Andrew Cuomo said Friday he is sending a letter to Merrill Lynchnotifying the investment bank that his office will file suit against it imminently as part of an investigation into the collapse of the auction-rate securities market.

"We have been trying to resolve the matter," with Merrill , Cuomo said during a conference call with reporters. Cuomo said he has not been able to reach a satisfactory agreement with the bank.


The letter being sent to Merrill is similar to one Citigroup received before settling with Cuomo. The New York attorney general's office is one of several regulators investigating whether financial companies misled investors in the auction-rate securities market; officials from several other states and the Securities and Exchange Commission have also been involved in negotiations with the big banks.

Merrill declined comment Friday. The expected lawsuit comes a week after Merrill said it would voluntarily repurchase auction-rate securities from customers. Merrill said it would buy back securities between Jan. 15, 2009 and Jan. 15, 2010. The bank said the repurchase plan would likely affect 30,000 clients holdings about $10 billion in the securities.

Cuomo said his office is investigating about 25 financial firms that were involved in selling the securities. The investigation includes Goldman Sachs and other underwriters of the securities as well as retail brokers, Cuomo said.

"We've had discussions with them," Cuomo said of Goldman Sachs . Cuomo's office has targeted the financial firms with the largest portfolios of auction-rate securities because settlements with those companies will affect the most customers.

Earlier Friday, Wachovia became the fifth bank to settle as part of the investigation; Wachovia agreed to buy back $8.5 billion of the securities from investors. The Charlotte, N.C.-based bank will also pay $50 million in fines to be distributed among states. The fines will be distributed to states based on the amount of securities sold to investors in each state.

Over the past eight days, Citigroup, UBS , JPMorganChase and Morgan Stanley agreed to repurchase a combined $32.6 billion in auction-rate securitiesand will pay fines totaling $310 million.

Nearly 150,000 customers have been affected by the five settlements.

The auction-rate securities market involved investors buying and selling instruments that resembled corporate debt, except the interest rates were reset at regular auctions, some as frequently as once a week. A number of companies and retail clients invested in the securities because they could treat their holdings almost like cash.

The bond-like investments were widely held by many institutional and individual investors and were seen as highly liquid, money market-like investments. However the market for them collapsed in February amid the downturn in the broader credit markets.

Regulators have been investigating the collapse in the market to determine who was responsible for its demise and whether banks knowingly misrepresented the safety of the securities when selling them to investors.

Like the other banks that have reached agreements with regulators, Wachovia will buy back all auction-rate securities from retail customers, charities and small businesses. It will buy back those securities by Nov. 28. Wachovia will also reimburse customers who sold securities at a loss after the market collapsed in February.

Wachovia will also repurchase securities from institutional shareholders by the end of June 2009. Wachovia neither acknowledged or denied any wrongdoing as part of the settlement.

These settlements come amid a time when banks have reported billions of dollars in losses from other investments because of deterioration in credit markets.

Banks have been forced to cut the value of mortgage-backed securities and other investments by more than $300 billion over the past year and added billions of additional dollars to reserves to cover likely loan losses.

Those losses have forced some banks to raise new capital to shore up their balance sheets.

Losses from the auction-rate securities are likely to be smaller than those from mortgage-backed securities.

UBS said it will take a charge of about $900 million on a pretax basis -- including its $150 million fine -- to buy back $18.6 billion in auction-rate securities.

Citigroup said it will take a pretax charge of about $500 million because of its settlement to repurchase $7 billion in the securities.