Massachusetts Friday filed an administrative complaint against Merrill Lynch & Co. for state securities law violations in regards to risky collateralized debt obligation investments the firm made on behalf of Springfield — investments that dropped in value by more than $12 million in nine months.

The securities division of the office of the secretary of the commonwealth filed an administrative complaint a day after Springfield officials, along with state Attorney General Martha Coakley, announced an agreement in which Merrill will pay the city $13.9 million, the total amount of CDOs that Springfield purchased through the firm, along with $150,000 in outside legal fees.

The ball is now in Merrill’s court to respond to Secretary William Francis Galvin’s allegations of violating state laws and regulations, yet the company said it was confused about the complaint. Merrill has 21 days to file a response.

“We are puzzled by this suit,” Merrill spokesman Bill Halldin said via e-mail. “We have been cooperating with Mr. Galvin’s office in its inquiry.”

The complaint seeks remedies including that the firm cease and desist from future violations, pay a yet to be determined administrative fine, give back all profits attributed to the transaction, and hire an outside consultant to evaluate Merrill’s supervisory processes to prevent this happening in the future.

While the city will regain the money it lost on the risky investments, Springfield Mayor Domenic J. Sarno said the issue is not laid to rest.

“Let’s be clear, this is not a settlement,” the mayor stressed during a press conference. “Merrill Lynch still needs to account to the commonwealth for its conduct in this matter. Also, the city has not had to give up any rights in return for this reimbursement. However, two months ago Merrill Lynch told the city that it had made its own investment decision and Merrill Lynch has now acknowledged that the purchases of these securities were made without express permission of the city. Merrill Lynch has now done the right thing.”

According to Galvin’s complaint, only qualified institutional buyers such as investment companies and banks can purchase CDOs, not municipalities and local governments.

“Many of the CDOs issued by Merrill Lynch were collateralized by certain assets by pools of subprime and other mortgage loans,” according to the complaint.

In March, Springfield Treasurer Salvatore Calvanese signed documents sent by the firm that certified the city as a qualified institutional buyer, allowing two Merrill agents, Carl Kipper and Manuel Choy, to sell the city CDOs. In April and June, the two agents bought on the city’s behalf three separate CDO investments for a total of $13.9 million without informing city officials the nature of the instruments. The city did not know it held CDOs within its portfolio until July when mention of the three investments in account statements changed from previous descriptions to incorporate “CDO” in the name of each instrument. By December, the combined estimated market value for the three CDOs was $1.02 million, a loss of over $12 million compared to the aggregate purchase price of $13.9 million.

Halldin said agents Kipper and Choy no longer work for Merrill.

“We believe Springfield to be unique,” Halldin wrote via e-mail. “With sales practices issues unique to these transactions.”

The CDO fiasco comes at a time when Springfield is hoping for a fiscal turnaround. In December 2006, the city hired Merrill to manage $50 million in investments. Part of the funds being invested came from a $21.4 million surplus of city funds.

Excess revenue is a welcome change in the city after it faced a $20 million budget deficit in fiscal 2004, an issue that prompted state officials to form a Springfield Finance Control Board to oversee the city’s financial operations. That board continues to monitor the city to this day.

Springfield is located in southern Massachusetts and has an estimated 2006 population of 151,176. Standard & Poor’s and Moody’s Investors Service rate the city BBB and Baa3, respectively. Fitch Ratings does not have an underlying rating for Springfield.

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