Hawaii county leis lawsuit on Merrill in ARS flap

Trouble in paradise? Apparently, as Maui Co. sues Merrill Lynch to get back its investments in auction rate securities.

Maui County is suing Merrill Lynch, Pierce, Fenner & Smith Inc. in federal court over access to $32 million invested in student-loan auction-rate securities, county officials announced Wednesday.

The county purchased securities from Merrill Lynch with the understanding they were safe, short-term, liquid investments, the officials said.

“The County of Maui was told that the investments could be easily accessed, just like cash,” said Maui Mayor Charmaine Tavares. “Assurances by Merrill Lynch at the time of the investment turned out to be false, and we are seeking justice for the taxpayers of Maui County.”

Merrill Lynch spokesman Bill Halldin defended the company.

“We acted appropriately, made relevant disclosures to the county concerning auction rate securities, and intend to vigorously defend ourselves,” he said.

County officials said about $44 million in student-loan auction-rate securities (SLARS) were purchased through Merrill Lynch between Aug. 16, 2007, and Jan. 16, 2008, and today, the county owns $32 million of the securities that are not liquid.

“Maui County seeks to recover its money,” said Joachim Cox of Goodsill Anderson Quinn & Stifel LLP, special counsel for the county.

Before the lawsuit was filed late last week, Maui County made a number of attempts to resolve this problem, Cox said.

“But Merrill Lynch was not responsive,” he said.

Just before the auction-rate securities market failed in February 2008, Merrill Lynch provided a report to the county reiterating that auction-rate securities have only a “slightly lesser degree of liquidity” than money market funds and reminded investors that auctions “hardly ever” fail, county officials said.

Then around Feb. 13, 2008, Merrill Lynch abandoned its practice of supporting auctions for the securities, the auction-rate securities market collapsed and the county was left stranded with SLARS that it could no longer sell at par, they said.

“Had Merrill Lynch honestly disclosed to the County of Maui the growing risks associated with investing in SLARS, the County of Maui would not have purchased SLARS at all,” Cox said.

The state of Hawaii also got caught up in auction-rate securities with Morgan Stanley Smith Barney.

Lawmakers were told in late December that about 37 percent of the state’s $2.6 billion investment portfolio was tied up in the securities.