Massachusetts Secretary of State Fines Merill Lynch For Securities Violations

Monday, April 29, 2013

The Boston Herald recently reported that Merrill Lynch & Co. was fined $250,000 by Massachusetts Secretary of State William Galvin following its sale of over $39,000,000 in unregistered securities to two Massachusetts cooperative banks. As USA Today notes, the sale involved auction-rate securities, which, according to Galvin, Merill Lynch brokers assured investors that any cash put into these securities could be redeemed with ease – despite what some believe were warning signs to the contrary. The auction-rate securities market allows investors to purchase long-term bonds with the assurance of the access to their cash by selling at weekly or monthly auctions where investment banks act as market-makers.

Galvin accused Merill Lynch of manipulating research reports that failed to position auction rate securities in a positive light. In addition to the $250,000 fine, Galvin also wants Merill Lynch to make investors who invested whole, as their cash is now tied up in long-term bonds.
Merrill Lynch released the following statement: "We are disappointed that Massachusetts filed this action because it ignores the only reason our advisers sold auction-rate securities: They believed they were good investments for clients willing to trade some liquidity for higher return. … Our research reflected the honest belief that (ARS) offered higher returns in exchange for less liquidity and noted that market changes had begun to occur."
Auction-rate securities have been in the headlines in recent years. Since at least 2008, the SEC has been involved in various enforcement actions and the like related to auction-rate securities.









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