Merrill Wins Time to Settle With Attorney General (Update4)
By Stephen Cohen and Philip Boroff
New York, April 11 (Bloomberg) -- Merrill Lynch & Co. won time to work out a settlement with the New York State Attorney General on how much to disclose about current and prospective investment banking clients in Merrill's stock research.
Attorney General Eliot Spitzer agreed to extend until April 19 a judge's order forcing the biggest securities firm to spell out its relationships with companies it recommends to investors.
Merrill shares fell $4.02, or 7.9 percent, to $46.90, the biggest decline since Sept. 17, amid concern Spitzer's actions may spur new regulations that will hurt profits at securities firms.
As Spitzer's office widened its investigation to brokerages including Goldman Sachs Group Inc. and Morgan Stanley Dean Witter & Co., the two sides worked ``to develop the right mechanism for making disclosures,'' said Darren Dopp, a Spitzer spokesman.
Forcing Merrill to reveal in research reports whether it is courting a company as an investment banking client could hurt its business. Companies selling stock or bonds, or considering acquisitions, would hire other firms to avoid revealing their plans to the public, analysts 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.
On Monday, Spitzer released private e-mails from former Internet analyst Henry Blodget and others which showed ``dramatic evidence'' that Merrill's stock research was overly positive in order to help the firm win investment banking business from companies analysts covered.
After Merrill client Internet Capital Group Inc. fell from $200 in 1999 to $13 a share in October 2000, Blodget wrote an e- mail saying ``there really is no floor to the stock,'' according to court documents.
Merrill continued to recommend the stock even after Blodget's comments, Spitzer said. Blodget, who left the firm in December, didn't return calls for comment.
Negotiations Continue
Merrill and Spitzer have been negotiating since Monday. The order was to go into effect 5 p.m. New York time today.
Since the investigation was announced, Merrill's stock has declined 13 percent. Morgan Stanley, Dean Witter & Co. lost 8 percent and Goldman Sachs has fallen 6 percent. The Standard & Poor's 500 Index has fallen 2 percent.
Merrill may seek a compromise, 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.
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. 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.
No Precedent
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 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.''
`Unilateral Decision'
Spitzer didn't have any SEC staff at his news conference Monday, although he said 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.
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.''
Corruption Charge?
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.
Merrill Lynch is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News. |
