US - New Jersey has sued Merrill Lynch for providing misleading information underlying its sale of US$300m in preferred stock to the state pension funds, said state attorney general Anne Milgram.
Milgram alleged that Merrill made misrepresentations about its financial health and engaged in the preferential treatment of other investors who were seemingly investing on the same terms as the state.
She added: "This case is about holding Merrill Lynch accountable for its conduct and for recovering important investment funds on behalf of the citizens of New Jersey."
According to the filing, New Jersey claims that Merrill distributed inaccurate and incomplete financial reports, under-stated the financial risks it was exposed to, and violated generally accepted accounting principles. For example, Merrill failed to disclose that it had over $50bn of additional high risk insured assets that were only reported on a net basis.
The state subsequently based the agreement to purchase $300m of preferred convertible stock in January 2008, on this misleading information, according to the suit. The state would then receive a 9% dividend on these preferred stock holdings.
However, Merrill sought to reset the terms of the stock deal last July, which the state accepted. The new terms meant that rather than receiving a 9% dividend, the stock holdings would be converted to 11 million shares of common Merrill stock, at an exchange ratio of $27.68 per share.
Merrill informed New Jersey that everyone from another investment group who had bought the original preferred stock under the same agreement and altered terms in July would receive the same investment terms, the claim said.
Yet at least one investor received an enhanced deal which included a more favourable exchange rate and continued retention of preferred stock with a dividend.
The filing also charges that the full extent of Merrill's financial position only emerged after Bank of America acquired it in January this year, revealing that the company had a $15.31bn loss in the fourth quarter of last year.
Bank of America has also been cited in the filing. Bank of America declined to comment.
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