Massachusetts sues, settles over ARS

Massachusetts has charged Merrill Lynch & Co. Inc. with fraud related to the sale of auction rate securities and settled a similar claim with UBS AG.
In its complaint, filed today the state claimed that New York-based Merrill’s officials knew as early as last summer that failed auctions were likely to occur, but didn’t warn its brokers or customers.
In August 2007, the managing director in charge of the firm’s auction rate trading desk sent an e-mail warning about “inventory creep” of the securities, the complaint said.
The firm that month held two conference calls to reassure its representatives about the ARS market, according to the complaint.
In February, five days prior to Merrill’s pulling out of ARS auctions, a research analyst with the company acknowledged problems with the market but nevertheless told the firm’s brokers during a conference call that it was committed to the securities, the complaint said.
Massachusetts also accused Merrill of “co-opting” its research to help sell the securities.
The suit seeks restitution for customers at par value.
Merrill is “disappointed” that Massachusetts filed charges, spokesman Mark Herr said in a statement. “
“In 2007, there were no failed auctions of securities sold to retail clients,” he said.
Mr. Herr said that the firm’s research noted that changes to the ARS market were occurring, and reflected an “honest belief that ARS offered higher returns in exchange for less liquidity.”
Meanwhile, UBS AG yesterday agreed to pay Massachusetts $1 million to settle the state’s investigation into the investment bank’s sale of auction rate securities to 17 cities and towns.
The Zurich, Switzerland-based company will also repurchase $3.4 million worth of auction rate securities that were sold to the municipalities, Massachusetts attorney general Martha Coakley said in a statement.
Further, UBS is paying $750,000 to the state to cover fees and costs and an additional $250,000 to provide support for cities and towns affected by the freeze of the ARS market.
A separate complaint against UBS, filed by the Massachusetts securities division over ARS sales to retail investors, is still outstanding.
In an agreement that was reached in May, UBS agreed to return $35 million that the municipalities spent on the securities, which have been hard to sell since the market dried up earlier in the year.
In February, the Attorney General’s Office began investigating allegations that UBS Financial Services Inc., and UBS Securities LLC, both based in New York, misled government entities as to whether auction rate securities were a permissible investment for them under Massachusetts law.
“Today’s news represents the final step in the resolution of this matter with the Massachusetts Attorney General,” the office said in a statement.
Massachusetts is not the only state seeking redress for soured auction rate securities.
Texas and New York have jumped into the fray, suing UBS for fraudulently promoting auction rate securities as safe investments when it knew that the market was in trouble.