SEC Reaches Preliminary Settlement with Merrill Lynch, Pierce, Fenner & Smith to Liquidate About $8.5 Billion in Auction Rate Securities

The Securities and Exchange Commission says it has reached a preliminary settlement agreement with Merrill Lynch, Pierce, Fenner & Smith to liquidate about $8.5 billion in auction-rate securities that are still held by the firm’s institutional and retail investors. Small businesses, individual investors, and charities have until January 15, 2010 to accept Merrill’s offer to repurchase at par value some $7.5 billion in ARS. The investment bank will provide liquidity to some $1.5 billion in ARS that were purchased by institutional investors.

Merrill has “agreed in principal” to the terms of the agreement and is not agreeing to or denying the SEC allegations by settling. The SEC has accused Merrill of misleading thousands of clients into thinking that ARS were highly liquid and equivalent to cash or money market instruments even when the investment bank knew that the market was in trouble.

This settlement does not exempt Merrill from being named in civil lawsuits filed by investors seeking restitution for their losses. As part of its agreement with the SEC, Merrill says it will not deny liability for liquidity loss. The SEC is also evaluating whether an additional fine needs to be imposed on Merrill.

Merrill, along with Goldman Sachs Group Inc. and Deutsch Bank AG, also reached an auction-rate securities market settlement with New York Attorney General Andrew Cuomo. As part of its agreement with the NY AG, Merrill will buy back from retail clients, with account balances up to $4 million, up to $12 billion of illiquid ARS at par. It will also pay a $125 million penalty fee.

Related Web Resources:

SEC Enforcement Division Announces Preliminary Settlement With Merrill Lynch to Help Auction Rate Securities Investors, SEC, August 22, 2008
Merrill Lynch to Buy Auction Rate Securities Positions From Its Retail Clients, Merrill Lynch, August 7, 2008
Merrill Lynch settlement with SEC worth up to $7B, Associated Press, August 22, 2008
Investment banks settle bond cases with New York State, International Herald Tribune, August 22, 2008
Description of Merrill Lynch’s ARS Practices and Procedures, Merrill Lynch (PDF)

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