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Merrill Lynch Accused of Deceptive Marketing of Auction-Rate Securities

Massachusetts Secretary of State William Galvin is coming down on Merrill Lynch, one of the largest securities firms in the U.S., for not disclosing to its investors the volatility of the auction-rate market.

Galvin claims that Merrill sold auction-rate securities to investors, even though it was aware that the market was collapsing. Galvin asserts that Merrill profited by $90 million over the past two years because of its program to sell auction-rate securities.  

Merrill’s research analysts were censored from disclosing the high risk of the market, which failed in mid-February this year and left many investors with illiquid holdings.  Galvin’s complaint also claims that Merrill pressured and often evaluated its analysts based on how they projected positive messages about auction-rate securities.

Galvin filed a complaint against UBS AG in late June for similar deceptive actions by the bank to sell auction-rate securities as money-market funds.  

This is not the first time Merrill Lynch has been accused of using questionable research to attract buyers. In 2000, Merrill was found to have published misleading research that encouraged investors to invest in two Internet companies, Interliant Inc. and 24/7 Real Media Inc., both of which held shares that plummeted in value over the course of one to two years. The SEC accused Merrill, along with nine other firms, in 2002 with using biased research to attract investors, which resulted in a $1.4 billion settlement.

The claim against Merrill Lynch urges the firm to compensate its investors for their investment losses and potentially pay a fine.  However, investors generally do not see any recovery from regulator actions.  The best (and often only) way for investors to seek redress is through an individual arbitration action.

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