SEC unveils Merrill accord in auction-rate probe

The US Securities and Exchange Commission reached an $8.5 billion agreement with Merrill Lynch & Co to settle allegations the firm misled investors when marketing auction-rate debt.

Merrill will buy back up to $7 billion in securities from individual investors, small businesses and charities and take steps to cover their losses, the SEC said in a statement today. The bank must also use “best efforts” to help other businesses and institutional clients unload about $1.5 billion in frozen debt, the agency said.

“Merrill Lynch's conduct harmed tens of thousands of investors who will have the opportunity to get their money back through this agreement,” the SEC’s enforcement chief, Linda Thomsen, said in a statement.

The announcement came a day after New York Attorney General Andrew Cuomo settled similar claims against Merrill, Goldman Sachs Group Inc and Deutsche Bank AG. That agreement brought to eight the number of firms that settled complaints in the last two weeks they misled investors by fraudulently marketing the long-term securities as easy to buy and sell.

Cuomo said yesterday that Merrill will pay $125 million in fines and buy back as much as $12 billion in securities. The SEC's $7 billion figure includes redemptions that are expected to cut the amount of debt held by customers.

Market’s Collapse: Regulators have accused banks of peddling auction-rate securities as safe investments that were as liquid as cash before the $330 billion market seized up in February. The credit crisis prompted banks to stop supporting the periodic auctions in which the long-term debt was bought and sold.

The SEC settlement requires Merrill to reimburse individuals, small businesses and charities for losses if they already sold their holdings. It also gives those customers an edge in arbitration claims over other damages, such as from missed business opportunities. The bank agreed not to contest liability for the loss of liquidity in those claims.

The Washington-based agency said it will decide later whether to seek an additional fine after weighing the extent of Merrill’ misconduct, the firm's efforts to help investors and the costs it incurs in doing so.

Merrill said after Cuomo’s announcement yesterday that it had reached a preliminary agreement with the SEC.

“We are pleased our clients have the certainty of a favorable resolution to this unprecedented liquidity crisis,”Chief Executive Officer John Thain, 53, said in yesterday's statement.