Merrill Lynch pays $12.7M to settle Texas auction rate securities case

Merrill Lynch settles Texas case for $12.7M

AUSTIN, Texas — Merrill Lynch will pay the state of Texas $12.7 million to settle an investigation into the brokerage firm’s marketing and sale of auction rate securities, state officials said Monday.

Texas Securities Commissioner Denise Voigt Crawford announced the settlement.

It concludes the state investigation into Merrill Lynch’s role in promoting and selling auction rate securities when it knew the market for these securities was failing, endangering investors’ money, the state’s securities board said in a statement.

Merrill Lynch and other firms marketed auction rate securities as cash-like instruments that could be accessed at almost any time. Auction rate securities are long-term bonds subject to a complex auction process that, upon failure, can result in accounts being frozen and lower interest rates on the bonds.

The board concluded that Merrill Lynch failed to tell investors of the possibility that the auctions could fail and they wouldn’t be able to access their cash.

In the second half of 2007 Merrill Lynch provided sales incentives to its financial associates to sell auction rate securities during a time when the auction process was at risk of failing, the board said.

The ARS markets froze in February 2008, triggering complaints from investors who could not withdraw money from their accounts.

As a result, in April 2008, the North American Securities Administrators Association formed a multistate task force, comprised of securities regulators in Texas and 11 other states, to investigate whether the nation’s prominent Wall Street firms had systematically misled investors when placing them in auction rate securities.

The initial agreement with Merrill Lynch was announced in August 2008 and required the brokerage firm to buy back auction rate securities purchased through the firm by retail investors. The timing of the repurchase requirements is outlined in the board’s consent order.