Merrill’s high-risk debt holdings probed

Embattled investment bank Merrill Lynch & Co. said Wednesday that federal regulators were investigating matters related to its holdings of high-risk mortgage debt.

The Securities and Exchange Commission began the investigation Oct. 24, the world’s largest brokerage firm said in a regulatory filing. It did not provide details but said it was cooperating with the inquiry.

Recent news reports have said the SEC inquiry included deals that Merrill struck with hedge funds to allegedly cloak its vulnerability to so-called sub-prime mortgage debt. The SEC has not publicly commented.

News late last month of a $2.24-billion third-quarter loss -- the biggest in Merrill’s 93-year history -- tied to the summer’s credit crisis shook the firm and swept out Chief Executive Stan O’Neal last week.

New York-based Merrill also said a class-action lawsuit by shareholders and a shareholder-derivative suit were filed recently against the company and several executives claiming they failed to disclose pertinent information about collateralized debt obligations, or CDOs, complex instruments that combine slices of different kinds of risk.

It was Merrill’s bet on CDOs, and sub-prime mortgages underpinning many of them, that proved to be O’Neal’s downfall.