Merrill Must Reveal Banking Clients in Stock Reports (Update2)
By Christopher Mumma
New York, April 8 (Bloomberg) -- Merrill Lynch & Co. must disclose in analysts' stock ratings whether the subject of the report is an investment banking client or if Merrill is courting the company's business, according to a judge's order.
The order was obtained by New York Attorney General Eliot Spitzer, who has been investigating former Merrill Internet analyst Henry Blodget and other Wall Street analysts for the past 10 months. Blodget left Merrill in December.
The Attorney General's office is probing whether securities firms gave overly optimistic ratings to stocks that were also investment banking clients. Spitzer said he has ``dramatic evidence'' that Merrill's stock ratings were biased and distorted to secure investment banking business.
``This was a shocking betrayal of trust by one of Wall Street's most trusted names,'' he said. ``The case must be a catalyst for reform throughout the entire industry.''
``We did not receive these documents so we're completely in the black as to what is going on right at this moment,'' said James Wiggins, a Merrill Lynch spokesman. ``As soon as we receive that courtesy from the attorney general, we'll review it and comment further.''
Spitzer said he tried and failed to negotiate a settlement with Merrill of the allegations raised by his office. He said the investigation is continuing and is not limited to Merrill. Spitzer said criminal charges could be brought.
`Damaging'
``As dramatic and damaging as this evidence is against Merrill Lynch, it may only be the tip of the iceberg,'' he said.
Merrill is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News.
Securities firms already disclose their investment banking relationships. On a Merrill report today about household products companies, the firm said in a footnote that it arranged securities sales within the past three years for Colgate-Palmolive Co., Estee Lauder Cos. and Gillette Co.
``The bit about pursuing business is new,'' said Charles Crane, a strategist at Victory SBSF Capital Management, regarding the disclosure requirement for companies being courted as investment banking clients. Victory oversees about $4 billion.
``More disclosure is better than less,'' Crane said.
Investor Complaints
Wall Street firms agreed in June to sever the relationship between investment banking and analysts, to ban analysts from trading against their recommendations, and require that they disclose their holdings.
The National Association of Securities Dealers and the New York Stock Exchange, which regulate securities firms, proposed rules in February that would enforce many of the points in the June agreement.
Investors complained as the stock market declined over the past two years that many analysts misled them during the boom in computer and Internet stocks that ended in 2000. Analysts often kept favorable ratings even after stocks began to plummet so that their firms wouldn't lose underwriting clients, critics said.
This pattern persisted as Enron Corp. collapsed. Some analysts continued to recommend the Houston energy trader's stock as it fell into a downward spiral that led to the biggest U.S. bankruptcy filing ever in December.
Congress has held hearings into Wall Street analysts' ratings |
