Massachusetts filed a civil complaint on Friday against brokerage Merrill Lynch and two brokers once employed at the firm, accusing the firm of fraud and misrepresentation when it sold complex securities its sold were unsuitable for the city that quickly became illiquid and lost most of their market value.
Secretary of State William Galvin of the Massachusetts Securities Division alleges that Merrill did not properly disclose the risks associated with the complex securities it sold, which are known as collateralized debt obligations.
A day earlier, Merrill had agreed to reimburse the city the $13.9 million it originally paid for the investments, which were tied to the floundering subprime mortgage. The value of the assets had fallen to $1.2 million. The firm acknowledged that after an internal review, Merrill realized Springfield did not authorize the purchase of the investments.
The complaint filed by Galvin states that Springflied did not authorize the purchase of the CDOs in question. The document adds that Merrill brokers Carl Kipper and Manuel Choy did not discuss the risks of owning the securities, even through those risks were well known to Merrilly Lynch.
The pair of brokers were fired on Friday, according to the Boston Globe.
Initially, Merrill said it did not have a legal responsibility to the city regarding the performance of the investment. It said Springfield had made its own decisions.
The order seeks that the parties stop selling the unsuitable securities and pay an administrative fine, disgorge all profits, censure them and appoint an independent consultant to review the breakdowns in incentives at the company.