Cuomo Threatens to Sue Merrill Over Auction-Rate Debt

Merrill Lynch has until Friday to settle an auction-rate securities case with New York Attorney General Andrew Cuomo's office or it will face a lawsuit, Cuomo warned during a CNBC interview.

Cuomo said he has tried to reach a settlement with the Wall Street investment banker in the probe but has been unsuccessful.

His office has reached $42 billion in settlements with five other banks, including Citigroup , Morgan Stanley and Wachovia , during an investigation into whether the banks misled investors who bought the offerings thinking they were secure but in fact were attached to high-risk debts that collapsed.

"Today is the last day," Cuomo said. "If we don't settle today, tomorrow at this time we'll be in court."

He said he'd prefer to settle the case and help refund money to those who purchased the securities, just as he has with the other banks involved. He called the auction-rate securities case "an investor's worst nightmare."

"I don't like to go to court," Cuomo said. "I like to resolve a problem, I like to get it done quickly, get people their money back. That's what this is all about, restore confidence in the market."

Merrill Lynch earlier this month agreed to buy back an estimated $12 billion in auction-rate securities, though the company said it has already been buying back the debt.

Watch the entire Cuomo interview at left.

Merrill Lynch's plan was on a voluntary basis and put no set timetable on the transactions.

Cuomo said he wants the investment bank to buy back the securities within a set period of time, and to also pay fines for having pitched them as safe investments to customers.

A spokesman for Merrill Lynch declined to comment.

The auction-rate securities market involved investors buying and selling instruments that resembled corporate debt, but the interest rates on the investments 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. But 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.

Cuomo said his office's aggressive action in the auction-rate securities matter has helped the stock market.

"I think I can help the marketplace because the marketplace left unchecked can get too aggressive and hyperactive," he said. "The regulators draw the lines on the field and they call fouls, and I think that actually helps the marketplace long-term. I know it helps investors confidence."

—AP contributed to this report.