Massachusetts Secretary of State William Galvin’s administrative fraud claim against Merrill Lynch, for unauthorized trading, failure to disclose risk and unsuitable investments in collateralized debt obligations (CDOs) involving a city of Springfield account, is arguably the tip of the iceberg in terms of municipal and other investor losses (involving many other brokerages and banks) tied to a risky CDO market that has all but collapsed. These investments also appear to have been peddled by the financial services community at a time last year when the underlying mortgage and real estate markets were already weakening substantially. Part of an apparently ongoing statewide investigation, the claim on behalf of the city of Springfield was filed despite Merrill Lynch’s deal with Massachusetts attorney general Martha Coakley to make full restitution of the city’s original $13.9 million investment plus the city’s outside-counsel legal fees.

As mentioned in our last posting, the broad failure of various industries (mortgage brokers, investment banks, and credit rating companies, among others) to provide accurate information on the risks associated with these investments is also being investigated by New York’s attorney general.

Claims by ordinary investors against their stock brokers of unauthorized or unsuitable investments can typically include the placement of funds in high-risk instruments without informing investors or taking into account their investment objectives such as age, financial situation and family circumstances. To recover their losses, ordinary investors who have been harmed by similar investments in CDO’s or other risky securities will have to become, in effect, their own private attorneys general to sort out with their own attorneys whether they have viable claims to pursue.