Merrill Lynch and Co., Inc. charged with fraud and misrepresentation related to about $14 million worth of subprime securities

Merrill Lynch and Co., Inc. charged with fraud and misrepresentation related to about $14 million worth of subprime securities it sold to the city of Springfield.
The complaint also charges Merrill agents Carl Kipper and Manuel Choy.
"This complaint is focused on Merrill Lynch's (MER:Merrill Lynch & Co., Inc
sale, through agents Kipper and Choy, of certain esoteric financial instruments known as collateralized debt obligations (CDOs) to the City of Springfield Massachusetts, which were unsuitable for the city and which, within months after the sale, became illiquid and lost almost all of their market value," the state said in its complaint. See full complaint
The charges come a day after Merrill Lynch reimbursed the city for its investment, and related legal fees, and said it had determined that the securities were bought without explicit permission from the city. See full story at WSJ.com (subscription required)
The complaint concurred, and said, "The city did not authorize these specific CDO purchases in advance."
The complaint seeks a cease and desist order against the firm and its agents and, a return of any profits from the deals and an unspecified fine.
According to the complaint, the relationship between Merrill and agents Kipper and Choy sprung from a longstanding friendship between Kipper and Stephen Lisauskas, the executive director of Springfield's Financial Control Board.
So, in November of 2006, the city hired Merrill to invest its surplus cash, the state said.
"The accounts, at least by the terms of the Merrill account documents, were not discretionary accounts," The complaint said. That means that any purchases made for the accounts have to be approved by authorized accountholders, not by the agents selling the securities.
"It was understood that Merrill was supposed to invest only in safe money-market-like investments authorized by city personnel that would protect the city's investment," the complaint reads.
But, the state argues that Kipper and Choy invested about $14 million of the city's money without the proper authorization, from the firm's own inventory, "circulated periodically to its agents for them to sell."
The largest position Springfield bought was in something called the Centre Square CDO, for which Merrill earned fess as an underwriter, and earned further fees for selling it on to the secondary market.
The complaint further states that Springfield was not even told the investment was in CDOs until months after the sale and, and that Kipper and Choy never evaluated their suitability for Springfield, "nor did they make any attempt to understand what these CDOs were collateralized with."
Greg Morcroft is MarketWatch's financial editor in New York.