Merrill Lynch Sued over Collateralized Debt Obligations
On Feb. 1, the Massachusetts Secretary of State William F. Galvin filed a lawsuit against New York-based brokerage firm Merrill Lynch , charging that Merrill and two of its brokers violated the state’s securities laws by selling “inappropriate” collateralized debt obligations (CDOs) to the city of Springfield, Mass. The CDOs lost 91% of their value within six months of their purchase.
The two now-former Merrill Lynch brokers, Carl Kipper and Manuel Choy, invested $13.9 million of the city’s money in the CDOs in late spring 2007; their value tumbled to $1.3 million. The CDO market has collapsed, making them impossible to sell.
In the 25-page complaint, the Secretary of State alleges that the sale of the CDOs was illegal, and that Kipper and Choy did not present the risk of owning CDOs to the city though they themselves knew of the risk.
The city of Springfield had hired Merrill Lynch in late 2006 to manage $50 million, and the firm was instructed to invest in AAA-rated securities that would be mature when the city needed operations-related cash.
Springfield is a new member of the growing crowd of government entities and agencies across the U.S. that have been burned by CDOs and other mortgage-related securities. The surge in subprime loan defaults has severely damaged the credit ratings of CDOs.
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