Massachusetts v Merrill Lynch

On July 31, 2008 the Commonwealth of Massachusetts filed an Administrative Complaint against Merrill Lynch. Secretary of the Commonwealth William Galvin alleged that Merrill had acted in a fraudulent, dishonest and unethical manner which ultimately resulted in "...thousands of investors being abandoned with illiquid investment." Those investments were the now infamous Auction Rate Securities.

The complaint filed, which can be read on Sec. Galvin's web site, is an interesting piece of reading. It is huge for a complaint, 80 pages long with 188 pages of exhibits. The introductory summary alone is over 12 pages. It will be quite a while before anyone could read the entire document and give an impartial opinion.

An observation, isn't it amazing how the press can read something as complicated as this complaint and write a story summarizing what was filed. Almost makes you think that they were given a release prepared by the government.

Regardless of the length, to me one thing stood out after reading the summary. The Commonwealth of Massachusetts is not accusing Merrill of having offered, purchased or sold the auction rate securities at non-market values. Sure the complaint alleges that Merrill did some things that appear to be improper, such as issuing reports that may have been overly exuberant.

From what I've read there does not appear to be anything that Merrill did wrong in a transaction. Sure people lost money and yes some are still holding the securities. No one like to lose money.

It must be remembered that Merrill is a publicly owned company and as such owes a fiduciary duty to its stockholders. It appears that Mr. Galvin's claim is that Merrill should have put itself out of business rather than having investors lose money.

At some point, the investors must take responsibility for their own actions.

As time permits, I will attempt to analyze the complaint and post my analysis.

An Interesting Week

What a week it was for the legal system as everybody involved in the potential bid rigging scandal, the auction rate securities fiasco, and the municipal derivatives investigation all ran to their local courts to file lawsuits against every financial institution of any size.

Los Angeles sued the mono-line insurance companies (as if they need any more problems) and also sued a laundry list of financial firms ranging from Merrill, Bank of America, Wachovia, Morgan all the way down to a relatively small firm, Investment Management Advisory Group (IMAGE). Just to make sure they got everyone, LA also included "Does 1-50".

Massachusetts sued Merrill, Connecticut and Florida are investigating, Stockton Ca sued anyone they could find while New York sued UBS. The hits just keep coming.

As far as the lawsuits involving municipal bid rigging, I will again state my position that these law suits brought by the municipalities seem to be more an effort to cast themselves as a party harmed. Especially since the federal government is very close to bringing its own action. The last thing the municipalities want is to be charged with some form of complicity in the bidding procedure.

Despite the bravado of LA City Attorney Rocky Delgadillo, ["Today we're sending the message that if you cheat the city, we will come at you with everything we've got, whether you're a gang banger or a Wall Street titan"], I think most of these suits should be dismissed because the plaintiffs will have a hard time proving they were harmed.

On July 29, in a piece written by Michael B. Marois, Bloomberg stated that US "Tax rules also stipulate that profits made by selling bonds at tax-exempt rates and then investing the proceeds at higher yields must be repaid as taxes."

While the profits on investing is not really a tax, more of a confiscation because the federal government takes everything, the concept is correct. The municipalities cannot keep the profits from investing. They cannot use that money generated through their own investing activities as any other citizen for the building of schools, roads, hospitals or any other worthwhile project. They must send the money to the IRS.

The bottom line is: the plaintiffs in the bid rigging lawsuits probably got all the profits they could get. The actions by the financial community probably did not harm those who filed the complaints. But what is unknown is how much did the municipalities know about the bidding procedure they are now challenging.

Eventually, we may all know the answer to that.