Merrill Lynch Built $40B 'House of Cards,' Subprime Suit Says

New York investment bank Merrill Lynch is facing a class-action lawsuit accusing it and top executives of deceiving investors last year by hiding a $40 billion exposure to risky subprime mortgage loans.

The amended suit, filed by the Ohio State Teachers' Retirement System, consolidates seven securities fraud complaints pending in the U.S. District Court for the Southern District of New York.

It alleges that thousands of investors, relying on Merrill Lynch's "false and misleading" financial statements, paid an inflated price for the firm's common and preferred stock between October 2006 and this January.

The statements allegedly hid a "house of cards" that Merrill created by accumulating a $40 billion portfolio of subprime-mortgage-backed securities.

By January, after Merrill announced a series of write-downs, the portfolio was worth just $10 billion, according to the suit.

Merrill's common stock traded as high as $97 per share during the class period but ended up at just $49, the complaint says.

The suit also names former CEO E. Stanley O'Neal and senior executives Ahmass L. Fakahany, Gregory J. Fleming and Jeffrey N. Edwards.

O'Neal and the other executives knew of Merrill's impending losses yet issued positive statements throughout last summer as the subprime crisis deepened, the suit says.

They allegedly were motivated by millions of dollars in cash bonuses and stock award grants tied to the company's performance.

O'Neal resigned in October, taking along a pay package worth $160 million, according to the complaint.

The 15-count suit seeks unspecified damages against the defendants for allegedly making fraudulent statements in violation of federal securities laws.

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