Securities Lawsuit Accusing Merrill Lynch of Facilitating Sale of Mortgage-Backed Securities to King County, Washington Can Proceed, Says Court

The U.S. District Court for the Western District of Washington says that King County, Washington has pleaded sufficient facts to continue with its securities fraud lawsuit accusing Merrill Lynch, Merrill Lynch, Pierce, Fenner and Smith Inc. and Merrill Lynch Money Markets Inc. of facilitating its purchase of allegedly toxic mortgage-backed securities and violating the Washington State Securities Act. The defendants had sought to dismiss the securities fraud complaint.

Per the plaintiff, the defendants sold more than $100 million of the toxic assets to King County through the entities Mansail II and Victoria Finance in 2007. At the time, the county had wanted to make conservative investments. Not long after, Mansail failed and Victoria was downgraded to “junk” and placed on negative credit watch.

The county, claiming $60 million in losses, contends that the defendants played the role of seller or dealer of the commercial paper but did not fulfill its responsibility of ensuring there were sufficient procedures in place so that unwise investments were avoided and adequate warning of investment risks were provided. The county also contends that Merrill Lynch and its subsidiaries knew that the securities it was selling were toxic and had even made efforts to get rid of its MBS.

The district court says that under the state securities law, civil liability for omissions and misrepresentations attaches both the seller of the security and parties that played a substantial role in the sale. The court found that the defendants of this securities case, as pleaded by King County, are “sellers” under the Washington State Securities Act and that the county wouldn’t have bought the MBS if it hadn’t been working with Merrill Lynch and its subsidiaries. The court also found that the county had adequately pleaded control person liability, as well as sufficiently alleged that the defendants had omitted or misrepresented the facts. It decided not to dismiss the county’s breach of contract claim accusing the defendants of failing to warn about the risks involved in the MBS investments.