Complaint Over Auction Rate Securities Market Details Brokers’ Greed

      MANHATTAN (CN) – In a federal filing replete with lurid examples of document destruction, inside trading, naked greed, lies and market manipulation, the City of Baltimore joins the long list of plaintiffs demanding treble damages from Citigroup, UBS, Merrill Lynch, Morgan Stanley, Bank of America, Lehman Bros., Wachovia and other banks that conspired to prop up the auction rate securities market, until it collapsed in a $300 billion rubble heap from which investors are still digging out.




     Baltimore’s lead counsel, Robert Eisler, with Cohen Milstein Hausfeld, cites numerous emails from defendants’ employees, including demands to “shut this guy down,” after a market analyst asked a question about the impending disaster, and comments such as “come on down and visit us in the vomitorium!” as the house of cards collapsed.
     Baltimore accuses the defendants of conspiring to fix prices for the ARS, which required institutional investors to pay a minimum of $250,000 to play, until the defendants lowered the minimum to $25,000 to lure in more players.
     By 2006, the two dozen broker-dealers who controlled the ARS market – which Massachusetts Secretary of State William Galvin described as “a Moroccan bazaar” – were raking in $600 million in fees a year, the complaint states.
     The complaint zeroes in on Frances Constable, managing director in charge of Merrill Lynch’s auction desk, who allegedly squelched an Aug. 22, 2007 memo from Merrill Lynch bond analyst Martin Mauro, which warned of the dangers of the ARS market, by pointing out the obvious fact that investors “need to rely on other buyers in the market to redeem the securities at par.”
     “The report was never published, because Frances Constable, the managing director in charge of Merrill Lynch’s auction desk, squelched it. ‘I HAD NOT SEEN THIS PIECE BEFORE AND IT MAY SINGLE HANDEDLY UNDERMINE THE AUCTION MARKET,’ she said in an email, replete with all capitalized letters, to two other Merrill Lynch employees later that day,” according to the complaint.
     “Ms Constable demanded that the analysts retract and rewrite the report, which appeared the next day with language added that rising rates made the securities ‘a buying opportunity.’ That same month, Ms. Constable sent messages to an analyst during a conference call with financial advisers. After a participant asked a question, she urged the analyst to ‘shut this guy down,’ adding: ‘He is focusing attention away from your positive message.’ At the time she was conveying these messages, Ms. Constable, alarmed by the potential failure of the market, wrote to a co-worked, saying ‘(c)ome on down and visit us in the vomitorium!'”
     Susman Godfrey joins Cohen Milstein as co-counsel.

%d bloggers like this: