Wall Street brokerage Merrill Lynch & Co. late yesterday agreed to reimburse Springfield for nearly $14 million in losses on risky investments its brokers sold to the city.
In a deal brokered by Attorney General Martha Coakley, Merrill agreed to repay the city for all its holdings in specialized investments known as collateralized debt obligations, which plummeted in value last summer with the subprime mortgage collapse.
Two Merrill Lynch brokers in Albany used city cash funds to purchase the complex investments without telling Springfield officials; moreover, state law forbids municipalities from investing cash in anything but conservative instruments. In an unusual move, Merrill essentially admitted wrongdoing on the part of its brokers.
"The City of Springfield and the Springfield Financial Control Board have said that neither body approved the purchases of these investments," the firm said in a statement. "After carefully reviewing the facts, we have determined the purchases of these securities were made without the express permission of the city. As a result, we are making the city whole and we have taken appropriate steps internally to ensure this conduct is not repeated."
Merrill declined to say whether the brokers were dismissed. The firm agreed to pay Springfield's legal fees, which were approaching $200,000.
Coakley lauded Merrill Lynch for making restitution but did not rule out legal action against the firm.
"We will continue to review this matter to determine if additional action by our office is necessary," Coakley said in a statement.
Secretary of State William F. Galvin is continuing to investigate Merrill Lynch's Springfield dealings. Galvin said he was concerned about Merrill's conduct and added, "I think we need to know the whole story."
Christopher Gabrieli, the former gubernatorial candidate who is chairman of the control board that oversees Springfield's finances, asked the attorney general to investigate when the losses came to his attention last year.
Merrill's agreement to repay means the city will no longer pursue a threatened lawsuit against the firm, people involved in the negotiations said.
"I have no doubt in my mind it was the quick and excellent action of the attorney general that precipitated this," Gabrieli said.
Springfield invested about $50 million in cash-management accounts with Merrill Lynch starting in November of 2006. In the spring of 2007, $13.9 million of that was placed in the risky collateralized debt obligations - which are securities linked to bonds and loans, including subprime mortgages.
The Globe reported earlier this week that Merrill failed to inform the city that it had purchased the debt obligations until last July, when it suddenly changed the names of three investments on the city's monthly statement to indicate that they were CDOs. Most of the money had been in an investment called Centre Square Ltd., which was then renamed Centre Square CDO.
By August, the market for such investments had started to plunge. And by the end of November, Merrill said the original $13.9 million was worth less than $1.3 million. The city didn't actually lose the money because it didn't sell the investments; rather, Merrill agreed to take them back and return the city's cash.
Merrill Lynch said the renaming of the investments was part of a broader effort by the firm to be clearer in its customer statements.
Merrill was the largest underwriter of collateralized debt obligations in recent years and last year lost a record $7.8 billion, mainly on its exposure to those investments. Merrill Lynch said this week that it was dramatically scaling back its CDO business.
Beth Healy can be reached at bhealy@globe.com.
