As reported in the Wall Street Journal, and cited on this blog, Merrill reimbursed Springfield, MA for losses on CDOs that were unsuitable investments (the city had made clear it only wanted low-risk products).
As Bloomberg tells us, that was not sufficient to halt a suit by the Massachusetts sttorney general’s office which had been investigating the transactions.
From Bloomberg:
Merrill Lynch & Co. was accused of securities fraud by Massachusetts regulators for selling the city of Springfield $13.9 million in collateralized debt obligations that lost 91 percent of their value.
Merrill and two of its brokers sold “unsuitable” securities to Springfield last year after the firm was hired to help manage the city’s short-term investments, Massachusetts Secretary of State William Galvin said in a complaint filed today. Galvin also alleges that Merrill was hired because one of the brokers was friends with a state official overseeing the city’s finances.
“Merrill was supposed to invest in only safe money-market like investments,” Galvin said in the lawsuit.
The suit was filed a day after Merrill agreed to reimburse Springfield $13.9 million for the losses, saying its brokers bought the CDOs without the city’s “express permission.” Galvin’s office last month subpoenaed documents from Merrill related to the sale and requested the two brokers, Carl Kipper and Manuel Choy, appear before state securities regulators.
“We are puzzled by this suit,” said Mark Herr, a Merrill spokesman, in a statement. “We have been cooperating with Mr. Galvin’s office in its inquiry.”…
Merrill, the world’s largest brokerage, bought CDOs for Springfield between April and June last year after it was hired to help manage the city’s cash. It didn’t give the city a detailed description of the investment until November, when it sent officials a private placement memorandum on Centre Square CDO, one of the series of securities it bought.
“This is the only record of any prospectus being received,” Edward Pikula, the Springfield solicitor, said. The city, the third-largest in Massachusetts, never received any documents on S Coast FD V CDO or TABS CDO, the other two series of securities that Merrill bought for it, Pikula said.
5 comments
Comments are closed.
>> We are puzzled by this suit,” said Mark Herr, a Merrill spokesman
Im sure the taxpayers and voters of Springfield are equally puzzled as to why Merrill had the keys to the city and substituted CDOs for city cash. IMHO, this investigation should hold the city responsible for this type of risk transfer. If they gave Merrill the keys to the car and let them drive while intoxicated, Springfield should have to disclose everything about that relationship as well! This type of situation is probably going on all over America and these types of transactions and the people that are using pensions and munis like daytrade pits need to be pt in jail ASAP!
IIMHO, this story will expand from city to city: CITY OF SPRINGFIELD, MASSACHUSETTS
REPORT ON EXAMINATION OF
BASIC FINANCIAL STATEMENTS
FISCAL YEAR ENDED JUNE 30, 2006
http://www.mass.gov/Asfcb/docs/auditors_fy06_fin_statemnt.pdf
**** Custodial Credit Risk – Investments
For investments, this is the risk that, in the event of a failure by the counterparty, the City will not be able to
recover the value of its investments or collateral security that are in the possession of an outside party. The City
has custodial credit risk exposure equal to $71,201,911 in debt securities and $205,599 in equity securities
because the related securities are uninsured, unregistered and held by the counterparty.
The City does not have an investment policy for custodial credit risk.
Of the Retirement System’s total investments of $253,617,090 there was custodial credit risk exposure of
$6,387,472 in alternative investments because the related securities are uninsured, unregistered and held by the
counterparty.
Investment Rate Risk
The City does not have a formal policy that limits investment maturities as a means of managing its exposure to
fair value losses arising from increasing interest rates.
Credit Risk
The City has not adopted a formal policy related to Credit Risk
> The Pool meets the criteria of an external investment pool. The Pool is administered by the Massachusetts
Municipal Depository Trust (MMDT), which was established by the Treasurer of the Commonwealth who serves
as Trustee. The fair value of the position in the Pool is the same as the value of the Pool shares.
The System participates in the Pension Reserve Investment Trust (PRIT), which meets the criteria of an external
investment pool. PRIT is administered by the Pension Reserves Investment Management Board, which was
established by the Treasurer of the Commonwealth of Massachusetts who serves as Trustee. The fair value of
the position in the PRIT is the same as the value of the PRIT shares
Anon of 6:03 PM,
It it just about unheard of for a brokerage firm to make an unhappy client whole. That to me says the conduct of the Merrill brokers was probably badly out of line.
Even in a mere brokerage relationship, there is a “know your customer” rule. Brokers are not supposed to put widows into highly speculative paper (unless the widow has said she likes gambling). However, because the decks are so heavily stacked against clients in the arbitration process, elderly clients whose accounts were churned seldom recoup their losses.
The suggestive phrase in the Bloomberg story is that Merrill was hired to “help manage” the city’s funds. That means they acting in some sort of advisory capacity, perhaps for a fee. That means their conduct would be held to a higher standard.
Re: Springfield: The City has been experiencing serious financial stress over the last several years and by the end of FY2004
faced a financial crisis. It was determined that the City needed the Commonwealth to provide short and long term
financial resources in order to avoid a financial collapse. The additional funding provided the much needed time
for the City to work with the Commonwealth to turn around the financial condition.
On July 9, 2004, the Massachusetts legislature enacted Chapter 169 of the Acts of 2004 entitled “An Act Relative
To The Financial Stability of Springfield.” Under Chapter 169, a Finance Control Board (FCB) was established
and vested with comprehensive authority over all of the City’s finances, including appropriations, borrowings,
transfers of funds, and municipal spending authorizations. Chapter 169 also established a $52 million trust fund
subject to the control of the Commonwealth’s Secretary of Administration and Finance (“the Secretary”) from
which interest-free loans may be disbursed to the City from time to time on terms and conditions determined by
the FCB and approved by the Secretary.
ECTION 8. No official of the city of Springfield, except in the case of an emergency involving the health or safety of the people or their property, shall intentionally expend in any fiscal year any sum in excess of such official’s departmental appropriation duly made in accordance with law, nor commit the city to any obligation for the future payment of money in excess of such appropriations.
Any official who intentionally violates the provisions of this section shall be personally liable to the city for any amounts expended in excess of an appropriation to the extent that the city does not recover such amounts from the person or persons to whom such sums were paid. The trial court of the commonwealth or a single justice of the supreme judicial court shall have jurisdiction to adjudicate claims brought by the city hereunder and to order such relief as the court may find 1092
appropriate to prevent further violations of this section. Any official who violates the provisions of this section shall be subject to removal.
For purposes of this act the word “official” shall mean a city department head, permanent, temporary or acting including the superintendent of schools and all municipal boards, committees and commissions which recommend, authorize or approve the expenditure of funds. However the word “official” shall not be construed to mean the city council, mayor or school committee.
SECTION 9. The provisions of this act shall be deemed to supersede any ordinance which is contrary or inconsistent with the provisions of this act.