NJ Sues Merrill over Pension Money Lost in Stock Deal

July 29, 2009 (PLANSPONSOR.com) - New Jersey Attorney General Anne Milgram has filed a lawsuit against Merrill Lynch & Co. charging that it sold New Jersey's Division of Investment, which manages pension funds for more than 780,000 active and retired state employees, $300 million in preferred stock based on misleading information about the firm's financial condition.

According to a news release from Milgram’s office, the complaint, filed in Superior Court in Hudson County, charges Merrill Lynch with breach of contract, negligent misrepresentation, and breach of the covenant of good faith and fair dealing. Also named as a defendant is Bank of America Corp., which acquired Merrill Lynch in a merger finalized earlier this year.

According to the state’s complaint, Merrill Lynch distributed inaccurate and incomplete financial reports, under-stated financial risks to which it was exposed, and violated generally accepted accounting principles. Largely on the basis of this misleading information, the state agreed in January 2008 to purchase $300 million worth of preferred, “convertible” stock.

In July 2008, Merrill Lynch sought to reset the terms of the stock deal and the state agreed to convert its preferred stock holdings to 11 million shares of “common” Merrill Lynch stock at an exchange ratio of $27.68 per share. The suit says that even though Merrill Lynch claimed that all other investors would receive the same investment terms, at least one investor received a preferential deal that included a more favorable exchange rate and continued retention of preferred stock with a dividend.

Assistant Attorney General Carol Jacobson told the Newark Star-Ledger the state is seeking to recover “at least tens of millions of dollars” in lost pension funds.

The state is also pursuing pension losses it says were caused by misleading information from Lehman Brothers (see NJ Slaps Lehman Execs with Suit over Millions in Pension Losses ).