Merrill Lynch acknowledges SEC investigation

Reports say agency looking into how subprime vulnerability was hidden

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updated 9:28 p.m. ET Nov. 7, 2007

WASHINGTON - Embattled investment bank Merrill Lynch & Co. acknowledged Wednesday that federal regulators are investigating matters related to its holdings of high-risk mortgage debt and said it is cooperating fully with the inquiry.

The staff of the Securities and Exchange Commission began the investigation on Oct. 24, the world's largest brokerage firm said in a regulatory filing. It did not provide details. Recent news reports have said the SEC inquiry includes deals that Merrill struck with hedge funds to allegedly cloak its vulnerability to so-called subprime mortgage debt. The SEC has not publicly commented.

News late last month of a $2.24 billion third-quarter loss tied to the summer's credit crisis — the biggest in Merrill's 93-year history — shook the firm and swept out its chief executive, Stan O'Neal.

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New York-based Merrill also disclosed in the filing that a class-action lawsuit by shareholders and a shareholder-derivative suit recently were filed against the company and several executives for allegedly failing to disclose pertinent information concerning its collateralized debt obligations, or CDOs, complex instruments that combine slices of different kinds of risk.

It was Merrill's bet on CDOs, and the subprime mortgages underpinning many of them, that proved to be O'Neal's downfall.

In a derivative lawsuit, a shareholder technically sues on behalf of the company itself.