Massachusetts sued Merrill Lynch on July 31 on the charges of fraud and “dishonest and unethical” conduct, Reuters reports.

Secretary of the Commonwealth William Galvin charged Merrill with creating and applying a scheme of sales of auction-rate securities that considerably misstated the nature and stability of the market.

The compliant charged Merrill with assembling its allegedly independent research department to write positive reports on the market. When the tone or content of the reports didn’t match Merrill’s sales and trading departments wishes, it forced the reports to be “retracted and replaced with a more sales-friendly piece.”

This left thousands of investors with illiquid investments, having to sell their securities to tax-exempt debt issuers – like hospitals, student loan companies and mutual funds – giving them short term interest rates on long-term debt.

Officials want Merrill to pay an administrative fine and be censured. In addition, they want to allow holders to cancel their purchase contracts or offer restitution for those who have already sold their securities below par.

Merrill has disputed the charges.

“We are disappointed that Massachusetts filed this action because it ignores the only reason our advisers sold auction rate securities – they believed they were good investments for clients willing to trade some liquidity for higher return,” said Merrill spokesman Mark Herr. “Our research reflected the honest belief that auction-rate securities offered higher returns in exchange for less liquidity and noted that market changes had begun to occur.”

Massachusetts also sued two units of the Swiss bank UBS AG in June on the same charges. An investigation with Bank of America is ongoing.

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.

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