Merrill Lynch recently agreed to “make whole” the city of Springfield, Massachusetts by paying nearly $14 million in connection with subprime losses the city suffered in cash accounts held with the brokerage firm. The city alleged that two brokers at the Wall Street brokerage house had invested the city’s cash accounts in collateralized debt obligations without the city’s permission and without explaining to city officials the risks of such an investment strategy. In addition, the city alleged that state law prohibited the municipality from investing in subprime debt instruments because such investments were not sufficiently conservative.

In a public statement, Merrill Lynch conceded that the investments had been made without the city’s express permission:

“The City of Springfield and the Springfield Financial Control Board have said that neither body approved the purchases of these investments. After carefully reviewing the facts, we have determined the purchases of these securities were made without the express permission of the city. As a result, we are making the city whole and we have taken appropriate steps internally to ensure this conduct is not repeated.”

News coverage did not address whether the brokerage firm would seek coverage for the payment under its Errors and Omissions liability coverage. The firm faces similar allegations of unauthorized subprime investments in a Dallas, Texas state court case entitled MetroPCS Communications, Inc. v. Merrill Lynch & Co., 07-CV-12430.