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Merrill Lynch to pay $550mn sub-prime settlements, new suits filed

Investment bank Merrill Lynch has agreed to pay out $475mn and $75mn to settle two class action lawsuits filed against it in relation to its sub-prime related losses.

The settlements are comfortably the largest sub-prime related payouts so far, and as attorney and partner in management liability specialists OakBridge Insurance Services, Kevin LaCroix points out, they show "the enormous stakes that may be involved in the mass of sub-prime and credit crisis-related litigation cases that remain pending".

On 16 January, lead plaintiff Ohio State Teachers' Retirement System agreed to a $475mn settlement of a class action it brought on behalf of Merrill Lynch shareholders.

The second settlement involved Merrill Lynch employees who invested in or held stock in the company retirement plans. Both deals are subject to court approval.

According to the bank's SEC filing, both cases "focused primarily on Merrill Lynch's subprime-related losses and related disclosures during the class periods" but "do not involve any admission of wrongdoing or liability."

The class action suits had referred to the "ticking time bomb" of Merrill Lynch's collateralised debt obligation (CDO) portfolio due to the deteriorating US sub-prime mortgage market. The suits further alleged that Merrill Lynch "knew or recklessly disregarded that the company was more exposed to CDOs containing sub-prime debt than it disclosed, and the company's class period statements were materially false."

LaCroix estimated that the $475mn deal "appears to be in the top 20 securities class action settlements of all time", and the $75mn agreement is one of the largest Employment Retirement Income Security Act (ERISA) settlements.

"The significance of the Merrill Lynch settlements may not be what they represent in and of themselves, but rather what their size may suggest for the remaining mass of sub-prime and credit crisis-related litigation," said LaCroix.

Neither settlement mentioned insurance payments or the involvement of directors' and officers' (D&O) or errors and omissions (E&O) liability.

Separately, two shareholder class action suits have been filed against Merrill Lynch's new owner, Bank of America (BofA), centring on the timing, discovery and announcement of the investment bank's $15.3bn in Q4 losses, which precipitated a $20bn capital injection and $118bn loan guarantee at BofA after the deal had closed.

The suits question why BofA didn't disclose the losses prior to putting the proposed Merrill acquisition to a shareholder vote.

Both lawsuits claim materially false and misleading statements in order to secure sufficient votes to get the takeover through and defendants, which include ousted Merrill CEO John Thain, are alleged to have known that excessive losses at Merrill should have been disclosed to allow shareholders a well-informed vote on the merger.

Meanwhile the New York Attorney General Andrew Cuomo is reported to have launched an investigation into potential irregularities executive bonuses Merrill Lynch paid just before its sale to BofA went through, quoting sources that the firm normally paid bonuses in January or February.

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