Merrill Settles With Massachusetts on Auction Debt

Merrill Lynch reached a settlement with Massachusetts over auction-rate securities, the latest in a string a accords between regulators and Wall Street firms over the $330 billion market that collapsed in February.

Under the settlement, Merrill agreed to reimburse investors with accounts under $3 million this month and those with accounts of $100 million of less by January.

Earlier Thursday, New York Attorney General Andrew Cuomo threatened to bring Merrill to court unless it reached a settlement with his office today over the securities.

In an interview on CNBC, Cuomo said he has tried to reach a settlement with the Wall Street investment bank but has been unsuccessful.

The auction-rate securities market involved investors buying and selling instruments that resembled corporate debt, but the interest rates on the investments were reset at regular auctions, some as frequently as once a week.

A number of companies and retail clients invested in the securities because they could treat their holdings almost like cash. But the market for them collapsed in February amid the downturn in the broader credit markets.

Watch the entire Cuomo interview at left.

Regulators have been investigating the collapse in the market to determine who was responsible for its demise and whether banks knowingly misrepresented the safety of the securities when selling them to investors.

Merrill Lynch earlier this month agreed to buy back an estimated $12 billion in auction-rate securities, though the company said it has already been buying back the debt. Merrill Lynch's plan was on a voluntary basis and put no set timetable on the transactions.

Cuomo said he wants the investment bank to buy back the securities within a set period of time, and to also pay fines for having pitched them as safe investments to customers.

"Today is the last day," Cuomo said during the CNBC interview. "If we don't settle today, tomorrow at this time we'll be in court."

He said he'd prefer to settle the case and help refund money to those who purchased the securities, just as he has with the other banks involved. He called the auction-rate securities case "an investor's worst nightmare."

"I don't like to go to court," Cuomo said. "I like to resolve a problem, I like to get it done quickly, get people their money back. That's what this is all about, restore confidence in the market."

His office has reached $42 billion in settlements with five other banks, including Citigroup , Morgan Stanley and Wachovia , during an investigation into whether the banks misled investors who bought the offerings thinking they were secure but in fact were attached to high-risk debts that collapsed.

—AP contributed to this report.

© 2008 CNBC.com