City of St. Paul, Merrill Lynch reach agreement over risky investment

St. Paul will get most of its money back from a brokerage firm that the city sued last year, alleging that the company misled the city into making an unauthorized, risky investment that went bust.

Merrill Lynch will pay the city $900,000 of its original investment, under a settlement unanimously approved by the City Council on Wednesday.

The city will give the investment, called Golden Key, back to Merrill Lynch. Should more than $900,000 be recouped from the investment, the two sides will share that amount.

"We are really pleased with the settlement, and this is a great example of what an aggressive civil prosecution strategy can accomplish for taxpayers," said City Attorney John Choi. "I'm glad we didn't give up and accept the financial loss, because $900,000 is a lot of money."

The city said Merrill Lynch, its longtime broker, knowingly sold it an investment -- backed by iffy mortgages and originated in the Cayman Islands -- that is unauthorized under Minnesota law.

Merrill Lynch denied the allegations. A spokesman declined to comment.

The original amount of investment was $993,884.17. The city wrote off the loss, and the money it will receive won't add to the city's bottom line.

Golden Key was a short-term investment product known as commercial paper. At the time of its sale in 2007, it was a $5 billion program.

Commercial paper is one of several investment types approved under a state law designed to make sure public money is put into secure investments. Governments and institutions usually buy and sell the short-term products because it gives them quicker access to cash.

Golden Key, however, happened to be backed in part by risky subprime mortgages. It also was based in the Cayman Islands, and state law only permits investment in U.S. or Canadian commercial paper that is deemed to be highly safe by multiple ratings agencies. Golden Key was highly rated when it came out and then bombed within weeks and had its assets frozen.

St. Paul has since stopped buying commercial paper and isn't using Merrill Lynch as a broker, city treasurer Todd Hurley said. Golden Key, he said, is in receivership.