Merrill Lynch & Co. Inc. Case 10/30/2007

Case Update -

On March 24, 2009, a Stipulation and Order Dismissing the Tolled Underwriters Without Prejudice from the case was granted by the court.

On March 03, 2009, an Amended Order Of Dismissal was filed with the court dismissing one of the actions without prejudice to refiling in the circumstances stated in the Opinion and Order. On the same day, a Stipulation and Agreement Of Settlement was filed with the court seeking approval of the proposed settlement of the parties.

On February 17, 2009, an Opinion on the defendants' motion to dismiss actions 07 Civ. 9696 and 08 Civ. 6582 for lack of standing was granted and the clerk entered a judgment dismissing the actions without prejudice. A subsequent order dated February 24, 2009, was entered into the court regarding oral argument on the pending motions to dismiss the Complaint held on February 19, 2009.

Original Post -

The background of this case suggests that several similar complaints charge Merrill and certain of its officers and directors with violations of the Exchange Act. Merrill offers a broad range of services to private clients, small businesses, institutions and corporations, organizing its activities into two interrelated business segments – Global Markets & Investment Banking Group and Global Wealth Management, which is comprised of Global Private Client and Global Investment Management. Specifically, the complaint alleges that, during the Class Period, defendants issued materially false and misleading statements regarding the Company’s business and financial results. Merrill had gone heavily into Collateralized Debt Obligations (“CDOs”) which generated higher yields in the short term but which would be devastating to the Company as the real estate market continued to soften and the risky loans led to losses. According to the complaint, Defendants knew or recklessly disregarded that (i) the Company was more exposed to CDOs containing subprime debt than it disclosed; and (ii) the Company’s Class Period statements were materially false due to their failure to inform the market of the ticking time bomb in the Company’s CDO portfolio due to the deteriorating subprime mortgage market, which caused Merrill’s portfolio to be impaired.

In early October 2007, Merrill acknowledged it would have to take a $5 billion third quarter 2007 charge for mortgage and credit problems. Then, on October 24, 2007, before the market opened, Merrill issued a press release which announced the third quarter charge would be $8 billion instead of $5 billion. On this news, Merrill’s stock dropped from $67.12 per share to as low as $61.40 per share, closing at $63.22 per share on volume of 52 million shares. Subsequently, on October 25, 2007, S&P reduced Merrill’s credit rating to negative after the brokerage reported the biggest quarterly loss in its 93-year history, causing Merrill’s stock to dramatically drop to $60.90 per share.

On December 28, 2007, a similar class action complaint, James Conn, et al. v. Merrill Lynch & Co., Inc., et al., filed in the U.S. District Court for the Southern District of New York, docket number 07-CV-11626, was filed on behalf of those who exchanged securities of First Republic Bank for securities of Merrill Lynch in connection with a merger. According to the complaint, the action was brought in violation of Sections 11, 12a(2) and 15 of the Securities Act of 1933. On March 12, 2008, this action was consolidated into the lead action, docket number 07cv9633. According to the complaint for this action, in late 2006 and early 2007, Merrill Lynch approached First Republic bank about a possible merger. On January 29, 2007, after a period of negotiations, Merrill Lynch announced that it had reached an agreement to acquire First Republic, subject to shareholder approval, for a total transaction value of $1.8 billion. Under the agreement, First Republic shareholders would receive at their election, cash or Merrill Lynch common stock having a value of equal to $55.00 for each share of First Republic common stock owned at the completion of the Merger. The aggregate consideration would be paid with 50% cash and 50% Merrill Lynch common stock.

To obtain approval from First Republic’s shareholder, Merrill Lynch filed the Registration Statement dated May 8, 2007, as amended on June 8, 2007 and June 21, 2007, which became effective on June 22, 2007, and the Proxy Statement and Prospectus dated June 22, 2007. Unfortunately, the Registration Statement and Proxy/Prospectus were materially false and misleading because, inter alia, they: a. failed to disclose and hid the fact that Merrill Lynch was overexposed to risky subprime loans, to the sum of billions of dollars; b. failed to disclose and hid the fact that Merrill Lynch had begun to accumulate a massive directional position in one of the riskiest types of collateralized debt obligations (CDOS), ABS CDOs; c. failed to disclose the risks of these CDOs, including the belief of Merrill Lynch’s own credit analysts that ABS CDOs were structurally deficient and would suffer in price as the underlying collateral deteriorated; and d. failed to disclose and hid the fact that Merrill Lynch did not properly value the CDO positions on its balance sheet. After receiving approval from the First Republic shareholders, the Merger was completed on September 21, 2007.

However, just weeks after the Merger was completed, and contrary to the representations in the Registration Statement and Proxy/Prospectus, and the oral communications made in the conference call of July 17, 2007, Merrill Lynch’s true exposure to subprime loans and CDOs began to emerge. On October 24, 2007, before the market opened, Defendants issued a press release acknowledging that Merrill Lynch’s third quarter writedown for CDO and subprime lending losses had ballooned to $7.9 billion. On November 2, 2007, The Wall Street Journal ran an article indicating that Merrill Lynch’s exposure to CDOs was even greater than Defendants had acknowledged, noting that Merrill Lynch would likely take an additional $4 billion in writedowns in the fourth quarter related to its CDO portfolio. The article also stated that the SEC had started an informal inquiry into how the company had marked its mortgage securities and whether it had lied to investors regarding the size of its positions. That same day, Deutsche Bank AG analyst Michael Mayo issued a research note stating that Merrill Lynch may have to take an additional $10 billion in writedowns related to its CDO and subprime exposure. The news was devastating to First Republic’s former shareholders, who had just exchanged their valuable shares for Merrill Lynch stock. Based on the September 21, 2007, closing date, Merrill Lynch stock was trading at approximately $75.00 per share. Thus, First Republic shareholders received approximately 0.7332 shares of Merrill Lynch stock for each share of First Republic stock. However, by November 2, 2007, after Merrill Lynch’s massive CDO exposure had been revealed, the Merrill Lynch shares obtained through the Merger had plummeted to $57.28, a 23% drop, and are presently trading at less than $55.00 per share.