Merrill sued by downstream ARS firm

Amegy Bank NA of Houston, and its broker-dealer affiliate, Amegy Investments Inc., have filed an arbitration claim against Merrill Lynch & Co. Inc. of New York. The bank is one of the so-called “downstream” firms that sold auction rate securities issued and managed by Merrill Lynch. “As far as we know, this is the first arbitration or lawsuit filed by a downstream firm against one of the majors,” said Paul Yetter, a partner at Yetter Warden & Coleman LLP of Houston, Amegy's attorney. The suit, filed last month, claims Merrill knew by as early as August 2007 that the ARS market would fail but did not disclose that risk to Amegy or the public. The ARS market froze up in February 2008 after all the major underwriters stopped supporting auctions for the securities. Amegy claims it purchased more than $240 million of ARS from Merrill, which it then sold to its clients. The suit seeks rescission of the remaining $140 million that Amegy clients still hold, plus unspecified damages. “There is no basis for or merit to any of Amegy's claims,” Merrill Lynch spokesman Mark Herr said in a statement. “Broker-dealer clients such as Amegy are seasoned investment professionals and knew or should have known and understood what products they were selling to their clients,” Mr. Herr said. “No amount of due diligence by even the most sophisticated investor could have uncovered Merrill’s secret and pervasive manipulations and deceptions,” Amegy's lawsuit says. In August, Merrill settled with state regulators and reached an agreement in principle with the Securities and Exchange Commission to buy back $7 billion in ARS from customers. The firm also agreed to pay a $125 million