Stan O’Neal yesterday bowed to the inevitable and announced his resignation as chairman and chief executive of Merrill Lynch after taking responsibility last week a $2.2 billion (£1 billion) third-quarter loss.

His departure came as Merrill Lynch faced a $10 billion class-action lawsuit that claimed the Wall Street firm issued false and misleading statements about its exposure to risky sub-prime mortgage investments.

The suit has been brought on behalf of the Life Enrichment Foundation, a New York charitable foundation with a small holding in Merrill, by Coughlin Stoia Geller Rudman & Robbins, the law firm best known for recovering $7.2 billion for the victims of the Enron fraud.

It contends that buyers of Merrill shares between February 26 and October 23 were duped into buying the stock at inflated prices because Mr O’Neal and other senior executives, made “materially false” statements relating to the true value of the mortgage-backed bonds on the books.

Last week, Merrill Lynch wrote down the value of its mortgage-related investment portfolio by $7.9 billion. The group’s shares have fallen by about 40 per cent between the end of February and last night, leaving investors nursing billions of dollars of losses.

Darren J. Robbins, of Coughlin Stoia Geller Rudman & Robbins, said his firm so far had 37 individuals and institutions lined up to join the suit. He said: “This case represents a watershed event in the mortgage meltdown and investors could potentially be entitled to more than $10 billion.”

A Merrill Lynch spokesman said last night: “The suit has no merit. We reported our financial data accurately.”

Mr O’Neal has been temporarily replaced by Alberto Cribiore, a board member, until a permanent head can be found. Merrill said that both the bank and Mr O’Neil agreed that a change in leadership “would best enable Merrill Lynch to move forward”.

Mr O’Neal, the first African-American to run a big Wall Street firm, is not entitled to a severance package, but is set to to walk away with $161.5 million in company holdings and retirement benefits.

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