The top securities regulator in Massachusetts accused Merrill Lynch on Friday of defrauding the city of Springfield with subprime-linked investments, casting light on how Wall Street banks sold complex mortgage securities that are now plummeting in value as the housing slump deepens.
William Galvin, the Massachusetts secretary of state, filed a civil fraud complaint against Merrill a day after the firm took the unusual step of agreeing to reimburse Springfield for losses on the investments. Merrill agreed to buy back the securities at their original value, $13.9 million, after determining that its brokers had not been authorized by Springfield to buy the securities on the city’s behalf.
“They are alleging fraud against a municipality, which carries with it much more gravitas than a simple lawsuit,” Mark A. Flessner, a partner at Sonnenschein Nath & Rosenthal in Chicago, said of the complaint. An official in Mr. Galvin’s office said the Springfield case was part of a larger investigation into Merrill’s sales of similar investments to other Massachusetts towns and cities.
Asked about the Springfield case, Mark Herr, a spokesman for Merrill Lynch, said, “We are puzzled by this suit.” He declined to comment on the broader investigation.