Attorney General Martha Coakley Announces Payment to Commonwealth by Merrill Lynch

BOSTON - Today, Attorney General Martha Coakley's Office announced that investment bank and financial services firm Merrill Lynch (Merrill) will make a payment to the Commonwealth of $300,000 related to Merrill's sales of auction rate securities to the city of Springfield. The payment stems from an investigation conducted by the Attorney General's Office during late 2007 and 2008 regarding whether certain Merrill representatives misled Springfield into investing in funds the company knew or should have known were impermissible under Massachusetts state law. Under state law, cities and towns cannot invest their short term cash funds into this type of security. The Attorney General's Office investigated whether Merrill representatives omitted material information, and/or otherwise misled Springfield officials, regarding the nature of the investment. As a result of that investigation, Merrill repaid nearly $14 million to the City of Springfield.

"We are pleased with Merrill's cooperation in this investigation," said Attorney General Coakley. "Our primary interest was to promptly return the lost funds to the city of Springfield. However, another important goal was to find a way to prevent this from happening to towns and cities in the future. The additional funds for town and city treasurer education and guidance will assist us in reaching this goal."

In January 2008, after discussions with the Attorney General's Office, Merrill repaid Springfield the amounts it had invested, which totaled nearly $14 million. The $300,000 payment, which is memorialized in an Assurance of Discontinuance filed earlier this week in Suffolk Superior Court, includes $225,000 for fees and investigative costs, as well as $75,000 to educate and train town treasurers and other municipal financial officials on investment management practices and to review Massachusetts entities' investments to determine their appropriateness. In the past month, the Attorney General's Office conducted a series of 4 regional meetings with municipalities throughout the Commonwealth designed to provide information and resources to support careful decision-making and identification of scenarios that might create significant risk.

Today's payment to the state follows earlier recoveries by the Attorney General's Office in the auction rate securities arena. In 2008, the Attorney General recovered more than $75 Million from UBS, Merrill Lynch, Citigroup and Morgan Stanley for Massachusetts governmental entities.

An auction rate security is a debt instrument, such as a bond, or preferred stock for which the interest rate or dividend is periodically reset through an auction mechanism. In some instances, towns and cities were persuaded to invest their cash accounts into these auction rate security accounts. Although these securities have long-term maturities of many years, they historically have been offered for sale at weekly or monthly auctions. However, the market for auction rate securities began to dry up starting in 2007 and by early 2008 the auctions through which the securities were sold experienced widespread failures. When an auction fails, liquidity disappears from the market as it becomes difficult to dispose of such securities at all, let alone at par value. Auction rate security investments have been frozen due to lack of market liquidity, and the value of many of the municipal investments have been written down by investment banks.

This matter was handled by Division Chief Glenn Kaplan and Special Assistant Attorney General Owen Lefkon of Attorney General Coakley's Insurance and Financial Services Division.

#########