Bank of America Corp's Merrill Lynch & Co unit has been found not liable by a federal appeals court for its alleged failure to disclose manipulative conduct related to the auction-rate securities market. Monday's decision by Judge Robert Katzmann of the 2nd U.S. Circuit Court of Appeals upheld a lower court ruling absolving Merrill of claims that its prospectuses and website failed to adequately disclose liquidity risks, including how the bank might refuse to use its capital to prevent the failures of auctions it led.  The judge wrote that Merrill sufficiently disclosed that liquidity depended on its own intervention in auctions, rather than "the natural interplay of supply and demand." The $330 billion auction-rate market froze in February 2008 when dealers stopped supporting the market.  This left many investors with debt they could not sell, or could sell only at a steep discount loss. Victory Against SEC. In winning the appeal, Merrill Lynch effectively defeated the SEC, which filed a brief in support of the investors.  The regulator reached its own settlement on the issue with Merrill in August 2008.  That same month, Merrill also reached a settlement with then-NY Attorney General Andrew Cuomo to buy back up to $12 billion of ARS's and paid a $125 million fine - without admitting or denying the charges. [reuters 11/14/11]