Former First Republic Bank shareholders sued Merrill Lynch & Co on Friday accusing the Wall Street investment bank and brokerage of hiding billions of dollars of losses related to subprime mortgages while the companies' merger was pending.
The complaint, filed in the U.S. Court for the Southern District of New York by investor James Conn, seeks class-action status.
It accuses Merrill and several executives and directors, including former Chief Executive Stanley O'Neal, of misleading First Republic shareholders about its finances as they considered Merrill's $1.8 billion takeover of the company.
Merrill Lynch effectively hid its subprime exposure right up until the close of the merger, said Mark Molumphy, a lawyer at Cotchett Pitre & McCarthy representing Conn. It's a sign of the times and the economy we are now living in.
Molumphy said former First Republic shareholders lost about $250 million because Merrill's share price declined in the weeks following the merger on September 21.
Merrill revealed an expected $5.5 billion write-down on October 5, and then on October 24, boosted the write-down to $8.4 billion. O'Neal's ouster followed on October 30.
Merrill Lynch spokesman Bill Halldin said the company made all appropriate disclosures.
Merrill had agreed in January 2006 to buy First Republic, which was based in San Francisco and specialized in serving wealthier customers. First Republic shareholders approved the transaction in July.
According to the complaint, Merrill made materially false statements in a June 22, 2007 proxy statement and prospectus distributed to First Republic shareholders.
It said Edwards also misled investors on a July 17 analyst conference call in saying that proactive risk management has put us in an exceptionally good position.
John Thain, who had led NYSE Euronext (NYX.PA: Quote, Profile, Research) (NYX.N: Quote, Profile, Research), the parent of the New York Stock Exchange, became Merrill's new chief executive on December 1. He was not named in the suit.
Shares of Merrill Lynch closed down 23 cents at $52.97 on the New York Stock Exchange.
(Reporting by Gina Keating, editing by Leslie Gevirtz, Gary Hill)