The US Securities and Exchange Commission (SEC) heaped further woes upon Merrill Lynch, the beleaguered Wall Street firm that has reported record losses and ousted its chief executive in the past week, by opening an inquiry into the adequacy of the bank’s disclosures to investors.

The watchdog is investigating whether senior Merrill Lynch executives knew more than they revealed to investors about the value of the group’s sub-prime mortgage-related investments after announcing a credit crunch-related writedown last week that was considerably higher than previously indicated.

Merrill Lynch gave warning on October 5 that it faced a writedown of about $5 billion (£2.4 billion) relating to collateralised debt obligations (CDOs), or pools of bonds, and loans to back leveraged buyouts. Less than three weeks later, on October 24, Merrill Lynch announced that, in fact, it had, taken an $8.4 billion writedown in the third quarter, which would give the firm the largest quarterly loss, of $2.2 billion, in its 93-year history.

Furthermore, some analysts are predicting that the firm will take a further $4 billion of writedowns this quarter as it struggles to offload its remaining portfolio of CDOs.

One source said: “It is not the huge number that is key here, but the fact that Merrill Lynch had a number but came out with a much bigger one shortly after.”

The SEC action, which is at an early stage and has yet to become a formal investigation, marks the latest blow for Stan O’Neal, who stepped down from Merrill Lynch on Tuesday after admitting responsibility for the group’s sub-prime mortgage-related losses. It comes as the firm faces a $10 billion class-action lawsuit, brought by Coughlin Stoia Geller Rudman & Robbins, the law firm best known for recovering $7.2 billion for the victims of the Enron fraud. The lawsuit contends that purchasers of Merrill Lynch stock between February 26 and October 23 were duped into buying the group’s shares at inflated prices. Coughlin Stoia estimates that investors are due at least $10 billion in compensation from overpaying for Merrill Lynch shares. The group’s shares fell about 40 per cent between the end of February and last night.

A Merrill Lynch spokesman said that the lawsuit had no merit. The bank and the SEC both declined to comment on the watchdog’s inquiry.

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