Merrill Lynch fined $100 million
NEW YORK — Merrill Lynch will pay a $100 million fine to settle charges its analysts had misled investors by touting shares in companies so the firm would win highly profitable investment-banking business from the same companies.
The agreement reached yesterday with New York Attorney General Eliot Spitzer also requires Merrill Lynch to stop rewarding its 800 analysts for helping the firm win investment-banking fees for arranging mergers and new stock offerings.
Merrill Lynch's analysts will be paid only for the quality of their stock research and won't get any money generated from the firm's investment-banking division.
"By adopting the reforms embodied in the settlement, Merrill Lynch is setting a new standard for the rest of the industry to follow," Spitzer said.
The nation's biggest brokerage also apologized and agreed to enact structural reforms to ensure its stock analysts work independently from its investment bankers.
Spitzer said he hopes the federal Securities and Exchange Commission (SEC), which regulates brokerages, will require all Wall Street firms to comply with the terms.
Annette Nazareth, the SEC's director of market regulation, praised Spitzer's work but said the SEC would continue its own probe.
"While this settlement is an important milestone for investor protection, it is not the finish line, and will not preclude our own efforts on behalf of the investing public," Nazareth said.
New York state will get $48 million, and the rest of the money will be given to the remaining 49 states and the District of Columbia and Puerto Rico as long as they accept the settlement's terms.
Spitzer, however, made a major concession by dropping a demand that Merrill Lynch admit wrongdoing, which would have crippled the brokerage's defense in at least 30 lawsuits filed by investors who blamed their losses on overly optimistic stock ratings.
"It would have in essence been a death warrant for the company to admit liability," Spitzer said.
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In a 10-month investigation, Spitzer's investigators uncovered e-mail from analysts that disparaged shares of Internet companies they rated as good buys for investors
Some used vulgarities to describe the stocks in messages that Merrill Lynch Chairman David Komansky called embarrassing to the company.
Komansky said the investigation and its revelations hurt Merrill Lynch's image, but "I think we'll be able to regain the confidence of the investing public."
The settlement goes far beyond efforts by the SEC and industry groups to reform analyst stock ratings and analyst compensation, said Benjamin Mark Cole, author of "The Pied Pipers of Wall Street: How Analysts Sell You Down the River."
"If analysts really are not paid from investment banking and attempt to pick stock winners, that will be a meaningful reform," he said.
However, Cole said, the settlement's true impact on analyst independence won't be clear for years. He also warned that analysts' jobs could still be threatened if they issued negative stock ratings on companies valued for potential investment-banking revenue.
"One has to wonder if brokerages will still fire analysts for not playing ball," he said.
Merrill Lynch stressed the agreement "represents neither evidence nor admission of wrongdoing or liability," and Komansky said the company would defend itself from the investor lawsuits generated by Spitzer's investigation.
Lawyers who filed those lawsuits were hoping for an admission of liability to bolster their cases but weren't surprised Merrill Lynch refused to give one, said Jill Abrams, an attorney with Abbey Gardy in New York.
Investors will still likely win settlements because Spitzer uncovered evidence lawyers can use, and Merrill Lynch apologized for the e-mail, she said.
Spitzer said prosecutors have already had talks with some of Merrill's Wall Street rivals about alleged analyst conflicts of interest but declined comment on whether similar settlements are expected soon.
Spitzer's investigators have subpoenaed records from at least six of Merrill Lynch's main competitors, including Goldman Sachs Group and Morgan Stanley Dean Witter.
Yesterday, Goldman Sachs issued a policy statement emphasizing "the analytic rigor, broad insights and objectivity" of researchers' work. And it named former New York Federal Reserve President E. Gerald Corrigan as "investment research ombudsman" to deal with any conflict-of-interest questions.
Sandra Kinsey, a securities attorney in the Miami office of Hogan & Hartson law firm, said the message being sent to brokerages is indisputable.
"Particularly in a down economy, you're taking away what they view as a significant marketing tool," she said of the rosy research reports. "All investment firms are going to have to do some real cleanup work to restore confidence in the system.
"It's in everybody's interest for there to be good research out there."
Information from Knight Ridder Newspapers is included in this report.