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Robert W Pearce
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Mr. Pearce has tried, arbitrated and mediated numerous disputes involving complex securities, commodities, administrative, contract, commercial, business tort and employment law issues for over 35 years. He has represented hundreds of clients in Federal and state courts (trial and appellate) as... More
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The Law Offices of Robert Wayne Pearce, P.A.
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The Investor's Rights Law Blog
    Dec 30, 2013 1:13 PM

    The United States Securities and Exchange Commission (SEC) charged Merrill Lynch with false and misleading disclosures relating to two collateralized debt obligations (CDOs) and false records relating to a third CDO. Merrill Lynch settled the case for $131.8 million simultaneous with the filing of the SEC's charges. According to the SEC, Merrill Lynch hid important facts from investors about a hedge fund known as Magnetar Capital, LLC and its involvement over the selection of collateral for the CDOs Octans I CDO Ltd. and Norma CDO I Ltd. Magnetar had undisclosed conflicts of interest. It bought the equity in the CDOs and hedged that equity position by shorting against the CDOs themselves.

    According to George S. Canellos, one of the SEC's Division of Enforcement Co-directors, "Investors did not have the benefit of knowing that a prominent hedge fund firm with its own interests was heavily involved behind the scenes in selecting the underlying portfolios." The SEC revealed damning emails in its press release. One email explained the secret arrangement: "We pick mutually agreeable (collateral) managers to work with, Magnetar plays a significant role in the structure and composition of the portfolio... And in return (Magnetar) retains the equity class and we distribute the debt." Magnetar's ability to influence the portfolio composition was in conflict with the interest of the debt investors. Merrill Lynch misrepresented the parties to the warehouse agreement; it hid the fact that Magnatar was one of three parties to the agreement. Magnatar excuted trades that were within its contractual rights but not in the best interest of the debt holders.

    Merrill Lynch agreed to pay disgorgement of $56,286,000, prejudgment interest of $19,228,027, and a penalty of $56,286,000 and a censure. It also agreed to cease and desist from future violations of the Securities Act of 1933 and Securities Exchange Act of 1934, for whatever that is worth, since it has signed numerous settlement agreements with the same provision in the past and not stopped violating those securities laws.

    The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. Please see our Instablog profile (left column) for ways to contact us and get answers to any of your questions about this blog post and/or any related matter.

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