DOW JONES NEWSWIRES

The Massachusetts Secretary of the Commonwealth charged Merrill Lynch & Co. ( MER) with fraud in pushing the sale of auction-rate securities while "misstating the stability of the auction market itself."

"This company was aggressively selling ARS to investors and its auction desk was censoring the research analysts to make sure they downplayed ARS market risks in research reports up to the day Merrill pulled the plug on its auctions, " Secretary William Galvin said. "They knew the auction markets were in trouble, but the investors were the last to know."

The complaint also alleges Merrill co-opted its research department to help sell the securities and seeks to order the brokerage to "make good" on the sales of now-frozen securities and make restitution to investors who sold at less than par.

Merrill Lynch had no immediate comment.

Earlier this week, units of UBS AG (UBS) disclosed they will pay $4.4 million to settle allegations from the state's attorney general's office that the bank misled cities and government agencies into investing in the troubled investment products. The payment will come in addition to the roughly $35 million that UBS agreed to pay in May to Massachusetts municipalities and agencies. The Swiss bank didn't admit or deny wrongdoing in the settlement, which it said " represents the final step in the resolution of this matter with the Massachusetts attorney general."

New York has also filed charges against UBS.

Auction-rate securities - issued by municipalities, student-loan companies, charitable organizations and others - are long-term securities that Wall Street engineered to have short-term features. Their interest rates reset at weekly or monthly auctions run by Wall Street firms. The firms promised individual investors and corporate clients that the frequent auctions made these securities as safe and liquid as cash because they would always be easy to sell quickly.

Thursday's complaint versus Merrill alleges the company had known for several months that the auction markets faced significant danger of collapsing.

In a personal email last November, one executive allegedly wrote, "The market is collapsing. No more $2k dinners at CRU," referring to a Manhattan restaurant. Yet about three months later, a research analyst told financial advisers the auction business represented a "good, conservative and reasonable investment."

Only five days later, Merrill decided to stop supporting the auction-rate securities, and most of the auctions failed the next day.

The complaint alleges Merrill Lynch made about $90 million from the auction market in 2006 and 2007.

Earlier this week, Merrill agreed to sell more than $30 billion in toxic mortgage-related assets at a steep loss, hoping to purge its balance sheet of problems that continue to plague the giant brokerage firm.

-By Lauren Pollock, Dow Jones Newswires; 201-938-5964; lauren.pollock@ dowjones.com

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  07-31-08 1101ET
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