SEC may jump aboard Merrill investigation
Wed Apr 17, 6:18 AM ET
Thor Valdmanis USA TODAY
NEW YORK -- The Securities and Exchange Commission (news - web sites) is considering a role in the expanding New York attorney general's investigation into whether Wall Street analysts publicly hyped stocks they knew were flawed in order to get investment banking business.
SEC officials plan to travel to Manhattan as early as Thursday to meet with New York Attorney General Eliot Spitzer to discuss the investigation, according to people familiar with the situation.
If it joins in, the SEC would carve out a place in a probe that many Wall Street executives fear could blow up into a scandal of Enron-like proportions.
At issue is whether Wall Street investment banks encouraged analysts to give companies positive stock recommendations in return for securing lucrative investment banking fees.
''The SEC is under enormous pressure to join this investigation. Otherwise, they risk being accused of riding on the back of the fire truck,'' says Columbia University professor John Coffee, who specializes in securities law.
The SEC declined comment.
Any SEC involvement in the inquiry could further underline the growing crisis of confidence in professions, such as investment banking and accounting, that are critical to maintaining the integrity of the nation's capital markets.
''If the allegations are true, I think they could have a very coercive effect on the psyche of the American investment public,'' says securities lawyer and Boston College professor Pete Michaels. ''This could be a much bigger scandal than Enron.''
Lawyers for the New York attorney general's office are expected to continue settlement negotiations today with Merrill Lynch, the first Wall Street firm to be targeted in the probe.
If no deal is reached, Spitzer has set Friday as a deadline for a court order to take effect that would force Merrill to disclose alleged conflicts of interest between its stock analysts and investment bankers. The order also would require Merrill to improve a stock-rating system that is heavily weighted toward ''buy'' recommendations.
In bringing his case against Merrill, Spitzer said his office uncovered evidence that analysts skewed stock ratings and gave favorable coverage to preferred clients even when those stocks were dubious investments. Spitzer took particular aim at Merrill's Internet research division and the high-profile head of that division, Henry Blodget.
Spitzer wants Merrill Lynch to admit it was wrong, change its research practices and allow investors to recover money they lost by following the firm's stock recommendations.
Any settlement could cost Merrill up to $100 million and open the world's largest brokerage to class-action lawsuits from shareholders. Merrill executives also risk civil and criminal charges.
Spitzer said the investigation was continuing into Merrill, as well as several rivals, and could lead to criminal charges. |
