Merrill Accused of Wrongdoing in MA Town's Investments
Springfield, Massachusetts, officials contend that Merrill violated state law by not properly telling them what investments it was making on their behalf after finding out the financial services firm had put their money into risky positions backed by subprime mortgages, the newspaper said. A key Springfield investment had lost more than 90% of its value.
The city’s stake in three collateralized debt obligations (CDO) valued at $13.9 million as recently as July and is now valued at $1.2 million, according to Merrill’s account statements, the Journal reported.
Springfield
officials say Merrill only eventually informed them about
the CDO sales by sending them a document issued by Centre
Square, a Cayman Islands-based company. That document
revealed that some of the CDOs could be backed by subprime
mortgages and might not be easy to sell, according to the
news report.
Merrill spokesman Mark Herr said the company did not
provide Springfield officials with the CDO’s prospectus
last spring when they were purchased because the
Springfield transaction was after the initial offering.
Under those circumstances, “there was no requirement for a
prospectus at the time of the purchase,” he told the
Journal.
For its part, the city is taking a hard line position. “I
believe Merrill Lynch is responsible and will be obliged,
in the end, to restore the city’s money,” Christopher
Gabrieli, chairman of the Springfield Finance Control
Board, which oversees the city’s finances, said in the news
report.
City finance officials argue that state law limits cities
to investing in safe, short-term, and easily tradable
investments.
According to the news report, state securities regulators
are probing Merrill Lynch about the sale, asking questions
about the timing and whether the brokerage firm did enough
to warn the city about the risks. The secretary of state
has subpoenaed brokers responsible for the sales. The
Massachusetts attorney general is also conducting an
investigation.
At least two local governments in Florida have accused Merrill of mishandling their pension fund investments (See South Miami Pension Trustees File Claim over Merrill Consulting Practices ).