The Wall Street Journal reported that Massachusetts authorities accused Merrill Lynch of fraud and misrepresentations in connection with Merill Lynch sale of Collaterialized Debt Obligation (CDOs) that recently collapsed during the subprime credit crisis.
The allegations come just a day after Merrill bought back the securities, known as collateralized debt obligations, from Springfield, Mass. Merrill repurchased the CDOs at the same price of $13.9 million that the firm initially sold them to the city last spring.
These CDOs, which are pools of debt that included subprime mortgages, had plunged in value to $1.2 million, according to a recent Merrill account statement for Springfield.
In the Massachusetts complaint, the secretary of state alleges that Merrill acted in a way that was "inappropriate and illegal." The complaint said "these highly-risky and esoteric CDOs were unsuitable for the City of Springfield [and] Merrill Lynch did not properly disclose to the City the risks of owning these CDOs."
The allegations are civil and could result in fines and other penalties, but the secretary's office doesn't have criminal authority.
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