Merrill Liable in Sale of Bonds Backed by Executive Life
WASHINGTON -- Merrill Lynch & Co. has been held liable for losses in bonds backed by Executive Life Insurance Co. that it sold in 1988 and 1989 to an Illinois bank.
An arbitration panel of the Municipal Securities Rulemaking Board found that Merrill Lynch and one of its brokers, Robert Peele, were liable for $176,982 in losses suffered by the unnamed national bank.
The bank purchased bonds from four of nine taxable issues backed by Executive Life guaranteed investment contracts in 1986, and damages were awarded on two of the transactions.
Arbitrators concluded that Merrill and Mr. Peele told the bank that the bonds were insured either by Municipal Bond Investors Assurance Corp. or Financial Guaranty Insurance Co. when, in fact, they were not. They also found that Merrill Lynch and Mr. Peele failed to disclose that bond proceeds were invested in GICs issued by Executive Life Insurance Co.
Midst of Controversy
The bonds in question are at the center of a controversy being played out in the Los Angeles County Superior Court. After Executive Life Insurance Co. of California -- the subsidiary that issued the GICs -- was placed in conservatorship in April, Insurance Commissioner John Garamendi indicated that municipal bonds backed by Executive Life would get scant treatment when the company is either sold or liquidated. As a result, bondholders already looking at losses of more than 75 cents on the dollar now contemplate complete losses.
The bonds originally plunged when Standard & Poor's Corp. realized the company's junk bond portfolio was crumbling and downgraded its claims-paying ability to A from AAA in January 1990.
The Illinois bank sought $355,334 in damages, plus interest, legal fees, and costs on all four bonds. But the panel held the firm and Mr. Peele jointly liable for losses on only two of the bonds: Louisiana Housing Finance Agency, 8.610%, due Aug. 1, 1996; and Louisiana State Agriculture Finance Authority, 8.25%, due Oct. 1, 1996.
No Damages on Other Bonds
Arbitrators did not award damages on the other two bonds -- El Paso, Tex., Housing Finance Corporation, 8.880%, due Oct. 15, 1996, and the Southeast Texas Housing Finance Corporation, 8.60% due Sept. 1, 1996 -- because the bank had been notified by another broker that the bonds were not insured early enough to have sold them at a profit. They chose, however, not to sell at that time.
In addition to damages, the panel awarded the bank $18,598 in lawyers' fees, costs, and interest on the $176,982 at an annual rate of 7.25%.
The bank said Merrill Lynch's confirmations on the bonds made it appear that these were typical housing finance agency type bonds and contained no reference to Executive Life or to GICs.
Merrill Lynch argued that the bonds were rated AAA by Standard & Poor's and fit well within the bank's investment parameters. The firm denied that Mr. Peele said the bonds were insured by either MBIA or FGIC, or that the bonds were standard, taxable bonds issued by various municipal housing or agricultural authorities. The firm said Mr. Peele did not recommend the bonds but, rather, located them and offered them to the bank to satisfy the bank's request.
Approach by Bank
The brokerage firm also argued that in March 1988, the bank's investment officer said he was interested in buying taxable municipal bonds, that he had reviewed several offerings and had bought some taxables from another brokerage firm. The bank's investment officer said the bank would buy some taxables from Merrill Lynch if the securities fit its investment goals. The securities giant also said Mr. Peele told the bank's investment officer that he had never sold taxables before, but that he would find out what was available at the firm.
Merrill Lynch added that the bank's investment portfolio was reviewed monthly by the bank's funds management committee, and that they could get further information from the firm or their own departments.
"We strongly disagree with the panel's conclusions, but will comply with the award," said Merrill Lynch spokesman Fred Yager. "This was an institutional customer who came to Merrill Lynch . . . This was not a case of Merrill Lynch trying to sell particular bonds to a customer."