More financial trouble is brewing for the City of Duluth.
This time it involves a three-million dollar investment made last July.

Last year, the City of Duluth invested 3 million dollars in Mainsail-a commercial paper asset. At the time it was thought to be a very safe investment...then the bottom fell out.

Now city officials are trying to figure out how an investment that was supposed to yield prosperous results, did exactly the opposite.

"It was represented to us as a very sound investment by Merrill Lynch. Moody's and the Standard & Poor's rated it very highly," said Genie Stark, City of Duluth director of finance.

Last July, the City of Duluth invested millions in Mainsail-a commercial paper manufacturer.
Based on initial reviews, officials say the security looked promising.

"It's a product that we were going to get a rate of return in the six to seven percent range," said Duluth Mayor, Don Ness.

At least-that was the hope.
Ness says the once promising investment soon turned into a nightmare.

"It was nearly a two million dollar hit," Ness said.

So what exactly went wrong?
City of Duluth Finance Director, Genie Stark says they City invested through the brokerage firm Merrill Lynch and says Mainsail in-turn invested in a very turbulent sector of the market.

"We found out afterwards when Mainsail went into a wind-down event that they were investing in residential mortgages," said Stark "Some of those were sub-prime mortgages."

The City says the current objective is to recoup as much as possible from the investment.

"So our challenge now is not only the budget deficit that we have of over five million dollars, but also rebuilding this undesignated reserve fund," said Ness.

City officials say the Securities Exchange Commission is currently investigating Merrill Lynch in regard to this matter.

In February the City of Duluth hired an attorney to assist in getting a fair value return on their investment. It's not a done deal yet but city spokesmen say its not looking good for getting much of the city's money back.

At this point in time, the city says they're looking at about 35-cents on the dollar or about one-point-one million dollars.
They're hoping that will improve along with the market.