Washington, D.C. – The SEC Enforcement Division announced Friday that it reached a preliminary settlement with Merrill Lynch, which involves the company reimbursing up to $7 billion to tens of thousands of defrauded investors.
Merrill Lynch was charged with misrepresenting Auction Rate Securities as safe and highly liquid investments.
Typically, when an investor wishes to sell his shares, the shares are placed in an auction. The company purportedly didn’t mention that the ARS liquidity depends on the company bidding on its own behalf when there is not enough demand for the shares.
In February 2008, Merrill Lynch stopped supporting auctions, allowing securities to go unsold. Unable to sell their shares, tens of thousands of investors were left holding illiquid securities.
Under the terms of the agreement, Merrill Lynch must liquidate ARS with account values of at most $4 million by October. By January 2nd, the company should liquidate ARS with values of up to $100 million. It must also try its best to liquidate ARS accounts valuing more than $100 million by the end of 2009.
To qualify for liquidation, the account must have been bought before the collapse of the ARS market.
After Merrill Lynch fulfills its obligations, the SEC may impose a financial penalty on the company.
The settlement must still be approved by the SEC.