Martha Coakley (D)

BOSTON (Legal Newsline)- Massachusetts Attorney General Martha Coakley has reached a settlement with Merrill Lynch over claims the company misled the city of Springfield into unlawfully investing into risky auction-rate securities.

In addition to the $14 million Merrill Lynch has repaid to the city, the investment firm will pay an additional $300,000 to the state in legal fees and damages, the attorney general's office said in a statement.

An investigation was conducted by the state in late 2007 and 2008, revealing Merrill Lynch representatives deceived city officials by not informing them state and city law prohibits municipalities from investing short-term cash funds in auction-rate securities.

About $75,000 of the $300,000 in fees will go towards educating municipal financial officers and town treasurers on investment management practices, along with, providing information to town officials on the risks of bad financial investments, the statement said.

A handful of financial institutions have been accused of illegally misrepresenting to clients the risks of investing in auction-rate securities for which the interest rate or dividend is reset periodically through an auction mechanism.

The market for auction-rate securities collapsed last year, leaving local governments and pension funds with securities they could not liquidate.

"We are pleased with Merrill's cooperation in this investigation," Coakley said. "Our primary interest was to promptly return the lost funds to the city of Springfield. However, another important goal was to find a way to prevent this from happening to towns and cities in the future. The additional funds for town and city treasurer education and guidance will assist us in reaching this goal."

This is not the first time the state has cashed in on unlawful financial practices. In 2008, the state collected $75 million from UBS, Merrill Lynch, Citigroup, and Morgan Stanley for financial malpractice.

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