Merrill accused of fraud for risky sub-prime investments

Massachusetts’ top securities regulator Friday accused Merrill Lynch & Co. of fraud and misrepresentation, a day after the world’s largest brokerage agreed to reimburse the city of Springfield $13.9 million in a dispute over an investment that soured.

An administrative complaint by Secretary of State William Galvin alleges that Merrill Lynch made unsuitably risky investments on behalf of Springfield without the western Massachusetts city’s permission -- investments that dwindled from $13.9 million to $1.2 million amid deterioration of the sub-prime mortgage market.

The complex securities were collateralized debt obligations tied to the sub-prime market. Merrill Lynch’s underwriting and sales of such investments became lucrative in recent years, but the securities lost nearly all their value after mortgage delinquencies accelerated last summer.

Merrill Lynch failed to properly disclose to the city the risks of the investments, “even though these risks were well known to Merrill Lynch,” Galvin’s complaint alleges. The complaint also says city officials never authorized the specific investment purchases.

On Thursday, Merrill Lynch agreed to reimburse Springfield by buying back the investments that soured.