Merrill May Contest Court Order to Disclose Clients (Update2)
By Stephen Cohen
New York, April 11 (Bloomberg) -- Merrill Lynch & Co. may contest a judge's order forcing the biggest securities firm to disclose whether it's also pursuing investment banking business when it issues research on a company, analysts said.
The court-ordered demand by New York State Attorney General Eliot Spitzer, scheduled to go into effect at 5 p.m., would put the firm at a disadvantage relative to rivals, analysts said. Companies selling stock or bonds, or considering acquisitions, would hire other firms to avoid revealing their plans, they said.
``If you have to disclose more than your competitors, that puts you at a disadvantage,'' said James Angel, an associate finance professor at Georgetown University.
Spitzer on Monday said internal e-mails from Internet analyst Henry Blodget and others provided ``dramatic evidence'' that Merrill's stock research was overly optimistic in order to help the firm win investment banking business from companies the analysts covered.
Merrill also may seek a compromise with Spitzer's office, such as prohibiting communication between analysts and investment bankers, said Robert Heim, a former assistant regional director in the SEC's New York office and currently a partner in the firm Meyers & Heim LLP.
``We fully expect them to comply with the order,'' said Juanita Scarlett, a Spitzer spokeswoman.
Merrill spokesman Tim Cobb declined to comment on the firm's plans. Merrill is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News.
Other Firms
Credit Suisse First Boston also has received a subpoena from Spitzer's office. Other securities firms, including Morgan Stanley Dean Witter & Co., Goldman Sachs Group Inc., Salomon Smith Barney Inc., UBS AG, Lehman Brothers Holdings Inc., Bear Stearns Cos., Deutsche Bank AG and Lazard Freres & Co. are all subjects of the widening investigation of research practices, the Wall Street Journal reported.
Lehman spokesman William Ahearn said the firm hadn't received a subpoena. Spokesmen for the other firms declined to comment.
The attorney general's office will question current and former Merrill officials in public hearings over the summer, a person familiar with the situation said. Among the expected witnesses are Blodget and Deepak Raj, the firm's director of equity research.
Since Monday, when the investigation was announced, Merrill's shares have dropped 4.7 percent. Shares were down 0.20 euro to 57.60 today in Germany. Morgan Stanley and Goldman Sachs dropped 2.1 percent and 1.8 percent, respectively. The Standard & Poor's 500 Index rose 0.5 percent.
Standing Alone
Spitzer's pursuit of the firms breaks with precedent.
His investigation was independent of similar inquiries and guidelines set by the securities industry's regulators and trade groups, including the Securities and Exchange Commission, the National Association of Securities Dealers, the New York Stock Exchange and the Securities Industry Association.
The NASD and NYSE in February proposed a plan, supported by the SEC, requiring more disclosure from brokerages and forbidding analysts from reporting to investment bankers. Spitzer's efforts go further. He sought to have Merrill spin off research as an independent firm, separate from the investment bank, the Wall Street Journal reported this week.
``It's unusual for the attorney general of New York to do something like this,'' said Edward Fleischman, a former SEC commissioner who is now senior counsel for Linklaters Alliance. ``Everything about this is unusual.''
Spitzer didn't have any SEC staff at his news conference Monday, although he said later he and his office ``absolutely look forward to working with the SEC as a partner in this.''
SEC spokesman John Heine declined comment and NASD spokesman Howard Schloss didn't return a call.
``I get the impression it was a unilateral decision,'' said Heim, the former SEC assistant regional director.
Fraud Law
Spinning off research as an independent firm may not be practical, Heim said, because institutional investors generally aren't willing to pay separately for research. They receive it along with trading services.
Spitzer attracted notice by citing the Martin Act, a state anti-fraud statute usually applied to small brokers selling penny stocks. The attorney general's comments signal he thinks he has a strong case, some lawyers said.
``The attorney general's office would not make specific allegations of wrongdoing without documents to substantiate them,'' said David Robbins, a securities lawyer and former prosecutor in the attorney general's office. ``It's very risky for an elected officer in New York to go against the West Point of capitalists -- Merrill Lynch -- without the goods.''
Robbins said Spitzer may be laying the groundwork for a potential charge of enterprise corruption, the most serious charge that can be leveled in the Martin Act.
Spitzer's charges and investigation also provide ammunition for class action lawyers who are rounding up individual investors who lost money on Internet stocks that Blodget and other analysts recommended.
``So much of securities law depends upon your being able to prove people's intent, and I don't think anything could be more impressive than some guy saying that `I think this is a piece of junk' while he's recommending the thing,'' said Herbert Milstein, a lawyer for some of the investors suing Merrill. |
