Trust Fund's Suit Accuses Merrill Lynch of Failing to Disclose Markup on Zeros

Article excerpt

WASHINGTON -- A Detroit trust fund has sued Merrill Lynch, Pierce, Fenner & Smith Inc., accusing it of charging "undisclosed, excessive markups" on its zero coupon bonds based on stripped Treasury securities.

The plantiff is asking its lawsuit be designated a class action.

The case may bring to the surface a host of legal questions that have surrounded the stripped government securities since they became popular three years ago.

Merrill Lynch's zeros, officially known as Treasury Investment Growth Receipts, or TIGRs, represent "claims on the future principal and interest" of Treasury instruments held by a custodian bank, according to sales literature from the company.

Merrill and other packagers of stripped Treasuries have treated them as instruments that, like the Treasury securities themselves, do not have to be registered with the Securities and Exchange Commission. SEC registration is the process of filing a prospectus disclosing the terms and conditions of the offering.

In a complaint filed last month in U.S. District Court for the Southern District of New York, the University Emergency Services Profit Sharing Trust, a profit-sharing fund for a group of physicians in Detroit, charged that the TIGRs should have been registered with the SEC, like a typical corporate security.

In an amended complaint filed this week, the plaintiffs also charge that MeRrill Lynch should have registered the TIGR offering as a mutual fund, arguing that the issue is a pooled investment vehicle.

The trust fund said in its complaint that it suffered a 22% loss over a two-week period after purchasing a Series 1 TIGR maturing on Nov. 15, 2011. The complaint charged that Merrill failed to disclose that the price of 7.001 included a "substantial markup" and that the bonds are callable in 2006.

The class action suit seeks damages equal to triple the losses suffered by the trust fund and by all of the other investors who bought Series 1 TIGRs.

The judge hearing the case has still to decide whether the suit will be granted class action status.

Merrill has not responded to the complaint, and a spokesman was unavailable for comment. Subject to Registration?

If stripped Treasury bonds are subject to registration with the SEC, the pricing of such issues likely would come under greater scrutiny and strengthen the hand of plaintiffs in cases such as these, the general counsel of one major dealer said. …