Massachusetts Accuses Merrill of Fraud

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.

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Stephan Savoia/Associated Press

William Galvin, Massachusetts secretary of state, filed a complaint against Merrill.

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.

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