SEC Supports Investors Who Say Merrill Lynch Rigged ARS Market

Auction-rate securities holders may have reason to smile. A new legal brief from the Securities and Exchange Commission (SEC) apparently supports their claims that Merrill Lynch & Co. rigged the ARS market.

According to the brief, which was filed in the U.S. Court of Appeals for the Second Circuit in New York, Merrill Lynch – now part of Bank of America Corp. (BAC) – failed to adequately inform investors of its alleged role in “propping up” auctions.

If the court agrees with the SEC’s argument, it could mean a reversal of other dismissed auction-rate cases in which brokers and dealers are accused of rigging the market, says a July 22 article by Bloomberg.

Following the collapse of the auction-rate securities market in February 2008, lawsuits by the SEC and state regulators led to the return of at least $60 billion to individual investors. However, other holders of the securities, such as many institutional investors, had their lawsuits dismissed. About $55 billion of the debt remains outstanding, according to the Municipal Securities Rulemaking Board. Trading in the market has fallen nearly 60%.

In April 2008, Merrill reached a preliminary settlement with the SEC that called for the firm to buy back $7 billion of the securities. At the time, the SEC said Merrill had misrepresented the products as “safe, highly liquid investments equivalent to money-market instruments and cash.” It also said Merrill Lynch failed to make adequate disclosures to investors.

According to the Bloomberg story, Merrill has responded to the SEC’s July brief by stating that the agency is trying to turn the case into one of misrepresentation, instead of market manipulation, by focusing on the company’s duty to alert investors to negative market conditions in late 2007 and early 2008.