SEATTLE (CN) – King County claims that Merrill Lynch sold it more than $100 million of “illiquid junk” and misrepresented “toxic” assets backed by subprime mortgages as safe investments. In its federal complaint, the county, whose seat is Seattle, says it lost “tens of million of dollars” after investing in “prime commercial paper” that Merrill Lynch described as a “safe, conservative, and liquid short term money market investment.”
“This case presents yet another example of what happens when a giant Wall Street bank chooses to elevate its thirst for profits above all else – over its duties to its clients and over its obligations to tell the truth,” the complaint states.
Both investment vehicles that issued the commercial paper defaulted shortly after Merrill Lynch sold King County the investments, according to the complaint.
Mainsail II “began to collapse” just 3 weeks after the transaction, and Victoria Finance “started a downward spiral” within weeks.
King County claims Merrill knew the investments were “high risk junk backed by an asset portfolio loaded with illiquid securities, the value of which was dropping like a rock.”
The complaint adds: “Merrill was having difficulty placing Mainsail commercial paper on anything but an overnight basis; Merrill had decided not to hold to maturity any Mainsail securities in its own account.”
Merrill knew that “the credit ratings assigned with the Victoria commercial paper were unreliable and that the risks associated with the paper were materially higher than the ratings implied and it was reasonably foreseeable that Victoria’s commercial paper would default,” according to the complaint.
The county seeks damages for securities violations and breach of contract and wants Merrill to cover its investment losses. It is represented by William Squires with Corr Cronin Michelson Baumgardner & Preece.
Bank of America bought Merrill Lynch in 2009 during the worldwide financial meltdown. The bank is not named as a defendant in this case.