Bloomberg is reporting that a settlement has been reached between Merrill Lynch (MER) and the Commonwealth of Massachusetts concerning auction rate securities (ARS). Resolving this way the enforcement action filed by the state’s Securities Division on July 31, 2008.
The regulator alleged that “Merrill Lynch knew about the increasing risk of collapse of the ARS market, but nevertheless continued to sell ARS securities to its clients as safe, liquid, money-market like instruments”.
The state also contended that the investment bank “misled its clients by falsely assuring them that ARS securities were liquid, money-market like instruments, co-opting its supposedly independent Research Department to assist in sales efforts geared towards reducing its inventory of ARS and unduly influenced the Research Department into publishing pieces with more sales friendly outlooks of the auction market”.
Under the terms of the agreement, starting October 15, 2008 – Merrill Lynch will buy back all illiquid auction rate securities, at par value, from its retail customers holding less than $3 million on deposit. In addition, Merill also agreed – on or after January 15, 2009, to buy back at par value, all illiquid auction rate securities from all other Merrill Lynch retail customers with deposits on account of $100 million or less.
The announcement comes several days after the investment bank indicated that it would start buying back close to $10 billion in auction rate securities from its investors, beginning on January 15, 2009, and ending January 15, 2010.
Other firms that have also agreed of buying back ARS include Morgan Stanley (MS), J.P. Morgan Chase & Co. (JPM), and Wachovia Corp.(WB).
Updated: Also today, New York Attorney General Andrew Cuomo held a conference call where he discussed developments in his ARS probe. Mr. Cuomo announced that besides Merill — Goldman Sachs (GS) as well as Deutsche Bank (DB) had also agreed to settlements in ARS probe ; with Merrill obligated to pay a $125 million civil penalty and buy back between $10 billion and $12 billion in securities from investors, followed by Goldman’s $22.5 million/$1.5 billion and Deutsche Bank paying $15 million and buying back about $1 billion of notes.
These settlements provide thousands of clients with access to billions of dollars in frozen funds since the auction-rate securities’ market collapse in February.