Merrill Lynch Acknowledges Impropriety Of Selling Subprime-Backed CDOs To A Municipality
Under threat of legal action, Merrill Lynch has resolved a dispute with the City of Springfield, Massachusetts by conceding that the sale of collateralized debt obligations (CDOs) backed by subprime mortgages to Springfield and the Springfield Financial Control Board was inappropriate. As part of the resolution, Merrill Lynch agreed to repurchase the CDOs for the amount that Springfield had paid for the CDOs and to pay Springfield’s legal fees.
The dispute arose when subprime based CDOs, that Merrill Lynch sold to Springfield for $13.9 million last spring, suddenly plummeted over 90% in value to $1.2 million, leaving the municipality in dire financial straits. Springfield asserted that the CDOs were improperly sold to it claiming, among other things, that:
1. Merrill violated state law by failing to inform Springfield of the nature of the investments;
2. Merrill failed to make required disclosures to Springfield; and
3. Merrill sold Springfield an inappropriate investment because state law limits cities to investing in government securities and other safe, short-term and easily tradable investments.
In addition to resolving the dispute by reversing the investment and paying Springfield’s attorneys fees, Merrill Lynch noted that neither of the brokers who sold the investments were still with the firm and that it had take appropriate steps to ensure that the conduct was not repeated.
This case provides an interesting insight into potential subprime-related claims possessed by municipalities, government agencies, small insurance companies, pension funds, endowment funds, and smaller banks that had need for safe, short-term, and easily tradable securities but were sold illiquid, highly risky, subprime CDOs and mortgage-backed securities. It is inevitable that similar claims of unsuitability and inadequate disclosure will be asserted many times in the coming months.
Page Perry, LLC is an Atlanta-based firm with over 125 years of collective experience representing investors in securities related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in counseling municipalities and other institutional investors regarding their subprime investment problems.
