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The Honolulu Advertiser
Posted on: Thursday, February 18, 2010

Maui takes Merrill Lynch to court

By David Waite
Advertiser Staff Writer

Hawaii news photo - The Honolulu Advertiser

Merrill Lynch says it will "vigorously defend" itself against the lawsuit filed in federal court by Maui County.

JIN LEE | Bloomberg News Service

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Maui County has filed a lawsuit in federal court against investment giant Merrill Lynch, hoping to recover about $32 million of taxpayer money the county has tied up in what are called "student loan auction rate securities."

Maui Mayor Charmaine Tavares said recovering the money would go a long way toward helping the county balance its budget for the coming fiscal year, with a budget shortfall for fiscal 2011 estimated at between $50 million and $70 million.

The lawsuit, filed Friday on behalf of the county by Joachim Cox, of Goodsill Anderson Quinn & Stifel, accuses Merrill Lynch of fraud, negligence and breach of fiduciary obligations for allegedly telling county officials that the investment was safe and fully liquid, akin to a money market certificate.

"At the time, the County of Maui was told that these securities were safe, short-term, liquid assets, which the county could easily access just like cash," Maui Mayor Charmaine Tavares said at a news conference yesterday at the Goodsill Anderson law offices in Honolulu.

A Merrill Lynch spokesman said the company did nothing wrong in its dealings with Maui County.

"We acted appropriately, made relevant disclosures to the county concerning auction rate securities and intend to vigorously defend ourselves in this matter," spokesman Bill Halldin said.

Maui County purchased $44.2 million in the loan auction rate securities between August 2007 and January 2008 based on assurances from Merrill Lynch representatives that the investment was a safe one and could be converted back into cash at any time, according to the lawsuit.

But beginning in August 2007, Merrill Lynch knew that demand for the type of auction rate securities the county had purchased had begun to ebb, leading the investment firm to purchase more of the securities to keep the auctions from failing, according to the lawsuit.

When Merrill Lynch officials realized the potential for a widespread investment market failure, the company began to aggressively market auction rate securities to Maui County and other investors hoping to reduce the company's own inventory of the investment securities, the lawsuit said.

Maui County officials said the investment firm failed to tell them about the decreasing demand for the type of investment securities the county had purchased, and on Feb. 13, 2008, Merrill Lynch abandoned its practice of supporting student loan auction rate securities.

Tavares said Maui has been trying to get its money back from Merrill Lynch ever since the market collapse in February 2008, but is still owed $32 million.

The lawsuit asks that a court order be issued against Merrill Lynch, ordering the company to repurchase all of the student loan auction rate securities still held by the county.