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Merrill Lynch & Co. engaged in the "same type of fraudulent conduct" that Goldman Sachs Group Inc. was accused of committing by the U.S. Securities & Exchange Commission in a lawsuit on Friday, a Dutch bank said Friday.

In a letter filed in New York State Supreme Court in Manhattan on Friday, lawyers for Cooperatieve Centrale Raiffeisen-Boerenleenbank BA, or Rabobank, said Merrill Lynch committed a similar fraud in the structuring of a $1.5 billion collateralized debt obligation, known as Norma CDO Ltd.


"The SEC charges bear directly on the sufficiency of Rabobank's complaint as Rabobank has alleged that Merrill Lynch engaged in precisely the same type of fraudulent conduct in the structuring and marketing of Norma through having failed to disclose that Norma's collateral pool had been selected to benefit short positions taken by" an equity investor in Norma, said Jonathan Pickhardt, a lawyer for Rabobank.

Rabobank sued Merrill Lynch in New York state court last year, alleging it was owed about $45 million in a senior secured loan when the CDO defaulted and was liquidated in 2008.

The Dutch bank claimed Merrill Lynch misrepresented that the CDO was carefully structured investment vehicle when Rabobank made a $57.7 million upfront loan in March 2007.

Rabobank claims the Norma CDO was a "dumping ground" impaired subprime assets and was structured with the help of a prized Merrill Lynch hedge fund client as a bet against the mortgage-backed securities market.

Merrill Lynch has asked for the Rabobank complaint to be dismissed, saying the risks inherent in Norma's assets were fully disclosed in the transaction documents and has failed to show Merrill committed fraud.

"The two matters are unrelated and the claims today are not only unfounded but weren't included in the Rabobank lawsuit filed nearly a year ago," said William Halldin, a Merrill Lynch spokesman.

On Friday, the SEC sued Goldman Sachs in U.S. District Court in Manhattan, claiming the investment bank committed fraud by misstating or omitting key facts about a synthetic collateralized debt obligation tied to subprime mortgages.

In part, the SEC claimed a hedge-fund firm designed the investment, but then bet against it and investors weren't told of the hedge-fund firm's role or its intentions.

Goldman denied the allegations and said it would "contest them and defend the firm and its reputation."

John Heine, a SEC spokesman, declined to comment late Friday on whether the regulator was investigating the Rabobank allegations.

Merrill Lynch is a unit of Bank of America Corp.

April 16, 2010, The Wall Street Journal


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