More Bad News For Wall Street -- Federal Prosecutors Investigating Merrill Lynch, UBS And Bear Stearns Over Subprime Securities
An article by Amir Efrati, Susan Pulliam, Kara Scannell and Craig Karmin in today’s Wall Street Journal reported that the U.S. Attorney’s Office in Manhattan has notified the SEC that it wishes to review the information gathered by that agency in its investigation of Merrill Lynch. The SEC probe, itself recently upgraded to a formal investigation, is examining, among other things, whether the firm booked inflated prices of mortgage bonds it held even though it knew that the valuation had dropped.
These developments are only the latest in a series of criminal and civil investigations being pursued by federal and state regulators in the wake of the mortgage-securities market collapse.
The Wall Street Journal had previously reported that the Brooklyn U.S. Attorney’s Office had launched a preliminary criminal investigation into whether UBS had improperly valued its mortgage-securities holdings. The SEC is also conducting a formal investigation into that issue.
Prosecutors in the same office have been investigating the collapse of the two hedge funds at Bear Stearns last summer. That collapse was also tied to losses in subprime mortgage-related securities. (Yesterday, Reuters carried a report quoting CNBC reporter Charles Gasparino that an indictment of Bear Stearns is possible.)
Other probes continue as well. The FBI is investigating 14 companies involved in the subprime meltdown. The New York Attorney General’s office is investigating whether the investment banks made sufficient disclosures to investors and credit-rating agencies about the mortgage-related securities.
Merrill Lynch is also the subject of a civil administrative proceeding brought by the Massachusetts Secretary of State over its sales of subprime-related debt to the City of Springfield. Massachusetts has accused Merrill Lynch of fraud in that proceeding.
State officials in both Maine and Massachusetts are investigating Merrill Lynch’s role in the sale of structured investment vehicles or SIVS, which often use subprime mortgages and other troubled asset-backed securities as their collateral. In August 2007, Merrill Lynch sold $20 million of commercial paper issued by a SIV known as “Mainsail II”, an affiliate of the London hedge fund Solent Capital Partners, LLP, to Maine’s state treasury department. Massachusetts Secretary of State William Galvin has asked Merrill Lynch for all “sales and marketing materials” related to the sale of Mainsail II to Massachusetts investors and a detailed breakdown of sales commissions on those transactions.
After writing down billions of dollars in losses related to subprime mortgage–related securities, these firms will now undergo nationwide criminal and civil investigation into their possible misconduct related to these securities.
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