MANHATTAN (CN) – Under CEO Stanley O’Neal, Merrill Lynch wasted, diverted and misappropriated corporate assets and put the firm’s entire earnings at risk through investments in subprime mortgage instruments, shareholders claim in Federal Court. Plaintiffs say Merrill Lynch already has lost $20 billion in these investments, and quotes new CEO John Thain as saying, “We have not seen the bottom.”
The staggering losses have “caused the company to sell assets and raise equity at ‘fire sale’ prices, thereby injuring further Merrill Lynch’s shareholders,” the complaint states. It adds a quote from Merrill Lynch’s Senior Economist Kathy Bostiancic: “We’ve only seen maybe the first wave or two impact, and there’s more to come.”
Plaintiffs say CEO Thain criticized his predecessor’s, and Merrill Lynch managers’ reckless spending on subprime mortgage instruments on Jan. 17, saying, “They shouldn’t be taking risks that wipe out the earnings of the entire firm.”
The complaint continues: “The concealed and systemic failure of risk management and lax credit standards under the leadership of Merrill Lynch’s former chief executive, defendant Stanley O’Neal, propelled the company to become the leading underwriter of billions of dollars of collateralized debt offerings (CDOs)secured by risky subprime mortgages. Throughout his tenure, the extraordinary risks to which the company was exposed by this heavy commitment to subprime investments were concealed from the company’s shareholders and the investing public generally.”
Merrill Lynch’s share price has fallen from $97.53 on Jan. 24, 2007 to $28 last week, the complaint states.
Plaintiffs criticize the company for failing to have a Chief Risk Officer position until Sept. 10, 2007, “long after the company’s operations and financial risks had grown to unmanageable levels.”
And they object that despite O’Neal’s resignation on Oct. 30, 2007, as the fiasco unraveled, O’Neal “is reported to have received termination benefits of as much as $150 million, notwithstanding the debacle that he had caused to befall the company.”
Among the damages they demand are that O’Neal and [CFO Jeffrey] Edwards repay the company all the compensation they got what was “based upon or otherwise tied to its financial statements that were materially false.”
Plaintiffs are represented by Richard Greenfield with Greenfield & Goodman.