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Brokerage probed in big loss for Springfield

Email|Print| Text size + By Megan Woolhouse
Globe Staff / January 4, 2008

Securities investigators for Secretary of State William F. Galvin have opened a probe of Merrill Lynch & Co.'s dealings with Springfield after the city lost nearly $13 million in investments that Galvin said were too risky for municipalities.

Investigators in Galvin's office subpoenaed Merrill Lynch officials yesterday in an effort to find out who advised the city to make the investments and what kind of advice they offered.

"We're interested in the documents that exist, the e-mails and communication records," Galvin said by phone yesterday. "We want to know who got paid. Then we can start to unravel the question: How did the City of Springfield find itself in this predicament?"

Springfield's multimillion investment was supposed to represent a new chapter in the city's beleaguered financial history. After years of financial woes, city officials tightened expenditures and in the last two years began generating surpluses, some of it invested through Merrill Lynch.

The investments, backed by home loans, plummeted in value amid the ongoing subprime mortgage disaster. Worth nearly $14 million last year, Springfield's investment today is worth just $1.2 million.

Springfield officials have blamed Merrill Lynch, saying the Delaware-based financial firm improperly invested city funds in risky instruments.

Merrill Lynch, meanwhile, has said the investments were "reviewed, approved and authorized by Springfield officials," according to The Republican newspaper in Springfield.

Mark Herr, a spokesman for Merrill Lynch, said yesterday that the firm will cooperate with investigators, but declined to discuss the state's probe. "We don't comment about regulators' inquiries, except to say that we cooperate whenever asked," he said.

The Springfield Finance Control Board, created by the state in 2004 to oversee the city's financial recovery, issued a statement yesterday saying that it had hired the law firm of Goulston & Storrs to investigate the matter and that the firm briefed city officials on Dec. 20. The law firm is expected to provide a final report and recommendations to the full board at its Jan. 17 meeting.

The board "believes that Merrill Lynch can and should be held fully accountable for any potential losses," the statement said.

The board said that it referred the case to Attorney General Martha Coakley last month.

"Our office has initiated a prompt review of this matter, with a focus on determining whether funds can be recovered for the City of Springfield and its taxpayers," Coakley said in the statement.

A spokeswoman for Coakley's office declined to provide additional comments.

Chris Gabrieli, a former venture capitalist and Democratic candidate for governor who joined the Springfield Finance Control Board as chairman in June, also declined to discuss details. "From what I know today, Merrill Lynch is accountable and responsible for this and will be obligated to fully pay the citizens and taxpayers of Springfield all the money involved here," he said last evening.

Galvin, whose office licenses and regulates the securities industry in Massachusetts, said information from the subpoena will help investigators determine the name of the broker or brokers who advised the city. The subpoena requires Merrill Lynch to provide lists of investments the company sold to the city, whether Merrill Lynch was an underwriter for the investments, and whether the company received payment in connection with the sales. The subpoena also requires the names of all brokers and third-party agents who sold or marketed investments to the city.

Galvin said investigations by his office can lead to a formal complaint heard by an administrative hearing officer and ultimately fines or other civil penalties.

Galvin said his office is investigating a similar case in Maine, involving a Quincy-based Merrill Lynch broker. He said his office is helping determine whether the broker advised a public retirement entity to invest $20 million in a fund that was later frozen.

Galvin said Merrill Lynch has a fiduciary responsibility to recommend appropriate investments to municipalities and institutions.

"These type of investments have been problematic, not just for cities and towns but across the board," Galvin said. "They're often marketed as 'like bonds,' which have a connotation of being very secure, quality investments."

The secretary of state's office required Merrill Lynch to provide all information requested in the subpoena by 3 p.m. next Thursday.

Megan Woolhouse can be reached at mwoolhouse@globe.com.

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