Iconix Brand Group Inc. filed a lawsuit against Merrill Lynch, Pierce, Fenner & Smith Inc. on Thursday accusing the financial adviser of fraud over the sale of $13 million in devalued auction rate securities.
Iconix engaged Merrill as a financial adviser in 2006 as the fashion group began to acquire its portfolio of home and apparel brands. In its complaint, filed in a Manhattan federal court, the company said its adviser encouraged it to invest in auction rate securities as part of its capital management plan. Lawyers for Iconix wrote that Merrill represented the securities to be safe and highly liquid.
Auction rate securities, or ARS, are long-term interest-bearing instruments of varying credit risk traded at auctions where their interest rates are reset. Prior to the subprime mortgage crisis, they were attractive to some investors who could ideally liquidate them at such auctions, which usually occurred weekly, biweekly or monthly.
According to the suit, Iconix invested more than $100 million in auction rate securities in 2007 at the behest of Merrill, including “tens of millions of dollars of ARS exposed to losses from exotic, high-risk derivatives.” In July 2007, a Merrill-managed auction of a security dubbed the Anchorage ARS in court papers failed because it did not attract enough bidders, the complaint alleged. Iconix argued Merrill then sought to “dump” such holdings from its own inventory and induced Iconix to buy $13 million of the Anchorage securities. According to Iconix, Merrill abandoned the market for certain high-risk auction rate securities days later, stranding it with the “decimated” Anchorage ARS.
A spokesman for Merrill Lynch said the company had no comment on Friday.
Iconix is seeking $13 million and legal costs as well as unspecified compensatory and punitive damages.