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DISB Finalizes Settlement Agreement with Merrill Lynch

Monday, January 24, 2011
“This action sends a strong message that states will not tolerate unethical or unlawful behavior,” said Commissioner Purcell.

(Washington, DC) — Interim Commissioner Gennet Purcell, Esq., of the DC Department of Insurance, Securities and Banking (DISB) recently signed a final Consent Order requiring investment firm Merrill, Lynch, Pierce, Fenner & Smith Inc. (Merrill Lynch), to complete or confirm to DISB its repurchase of auction-rate securities (ARS) from District of Columbia clients to settle allegations that the firm’s securities dealers misled investors about the safety of the ARS market. “DISB is holding Merrill Lynch accountable for engaging in unethical behavior by selling auction rate securities to District investors without full disclosure of the risks involved,” said Ms. Purcell, who signed the Consent Order January 3, 2011. “This action sends a strong message that states will not tolerate unethical or unlawful behavior.” Although marketed and sold to investors as safe, liquid, and cash-like investments, ARS are actually long-term investments subject to complex auction processes that failed in early 2008, leading to illiquidity for investors. “From the day these auctions first failed, DISB has been seeking much needed relief and liquidity for investors stuck with them,” Ms. Purcell added. “I am pleased that Merrill Lynch has agreed to do what’s right by repurchasing clients’ positions, and I expect other firms that sold these securities in the District of Columbia to do the same.” The order also requires Merrill Lynch to pay a $1,358,987.54 fine to the District of Columbia. This amount represents the District’s pro-rata share of a $125,000,000 million settlement negotiated by a multistate task force of state regulators formed by the North American Securities Administrators Association (NASAA).  Early in 2008, state offices began receiving complaints about ARS from investors throughout the country.  During the investigation, regulators discovered that Merrill Lynch’s securities dealers failed to adequately inform customers and train employees on the risks associated with buying ARS. The Consent Order is the final step in the District’s ARS case against Merrill Lynch, which was tentatively settled May 2009.  DISB has entered into settlements with two other Wall Street firms, which involved sales of ARS totaling $169,839,368. Those settlements have resulted in the payment to the District of $658,377.70 in fines. DISB is actively negotiating similar settlements with other firms regarding ARS sold in the District of Columbia. SB-CO-05-10: Merrill Lynch, Pierce, Fenner, & Smith Incorporated