TRENTON – Attorney General Anne Milgram announced the filing of a lawsuit against Merrill Lynch & Co. this week, charging that it sold New Jersey’s Division of Investment $300 million in preferred stock based on misleading information about the firm’s financial condition.
In addition, the suit charges that Merrill Lynch subsequently gave at least one investor in that stock offering better terms on the conversion of those shares than New Jersey, despite representing that all investors would be treated equally.
“The state relied on Merrill Lynch to provide the whole story and the company failed to do so. Instead, our lawsuit charges that Merrill Lynch made misrepresentations about its financial health and engaged in the preferential treatment of other investors who, ostensibly, were investing on the same terms as the state,” said Milgram. “This case is about holding Merrill Lynch accountable for its conduct, and for recovering important investment funds on behalf of the citizens of New Jersey.”
Filed on July 28 in the Law Division of State Superior Court in Hudson County, the complaint charges Merrill Lynch with breach of contract, negligent misrepresentation and breach of the covenant of good faith and fair dealing. Also named as a defendant is the Bank of America Corp. Bank of America acquired Merrill Lynch in a merger finalized earlier this year, and is named in the lawsuit as a successor entity.
According to the state’s complaint, Merrill Lynch distributed inaccurate and incomplete financial reports, under-stated financial risks to which it was exposed and violated generally accepted accounting principles. Largely on the basis of this misleading information, the state agreed in January 2008 to purchase $300 million worth of preferred, “convertible” stock. Under terms of the sale, the state would receive a 9 percent dividend on these preferred stock holdings.
In July 2008, Merrill Lynch sought to reset the terms of the stock deal and the state accepted. Under terms of the new agreement, the state would no longer receive a 9 percent dividend on its investment, but its preferred stock holdings would be converted to 11 million shares of “common” Merrill Lynch stock at an exchange ratio of $27.68 per share.
According to the state’s complaint, Merrill Lynch informed New Jersey that all other members of an investment group that had bought the original “preferred” stock—and who had then agreed to the July 2008 common stock conversion—would receive the same investment terms.
In fact, the lawsuit charges, at least one investor received a preferential deal that included a more favorable exchange rate and continued retention of preferred stock with a dividend.
The state’s lawsuit charges that the reality of Merrill Lynch’s financial situation emerged only after Bank of America Corp. acquired Merrill Lynch and acknowledged—in January of this year—that the company had recorded a massive, $15.31 billion loss in the fourth quarter of 2008.
The state’s lawsuit was handled by the law firms of Cohn Lifland Pearlman Herrmann & Knopf LLP of Saddle Brook and Wolf Popper LLP of New York, N.Y. Assistant Attorney General Carol G. Jacobson of the Division of Law handled the matter on behalf of the state.
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