Washington, April 24 (Bloomberg) -- New Jersey and California have joined New York in leading an investigation of whether Merrill Lynch & Co. and other securities firms violated laws by misleading investors with biased stock research.
States nationwide may seek restitution from Merrill. ``If there is fraud, we want to make California investors whole,'' said Andre Pineda, assistant commissioner for the California Department of Corporations. On Monday, the department issued a subpoena for information about 17 technology stocks Merrill analysts recommended to California investors.
``Other states are getting involved,'' New York Attorney General Eliot Spitzer told a Capitol Hill news conference. ```It is an issue I think is shaking the foundation of Wall Street.'' The Justice Department also plans to investigate research analysts.
Spitzer conducted a 10-month investigation into Merrill Lynch's research and released e-mails that he said showed Merrill analyst Henry Blodget and others denigrated stocks they recommended to investors. Spitzer also said they gave favorable ratings to companies to lure and retain banking clients.
Merrill Lynch and the attorney general last week announced an agreement for the firm to disclose more about potential conflicts of interest in its stock research.
On Tuesday, Merrill named 640 corporate clients on its Web site, a list that starts with ABN Amro Holding NV, the Dutch bank, and ends with Zymogenetics Inc., a Seattle-based biotechnology firm it helped take public earlier this year. Spitzer is also seeking restitution and an admission of wrongdoing from Merrill.
Giuliani
The biggest securities firm by capital confirmed it has hired former New York Mayor Rudy Giuliani as an adviser as it continues to negotiate with Spitzer to avoid criminal charges.
Merrill is motivated to settle because the prospect of criminal charges and shareholder lawsuits could hamper its business in the same way Arthur Andersen LLP has been hurt by it links to failed energy trader Enron Corp., legal experts said.
Spitzer's office is investigating other firms, including Credit Suisse First Boston, Morgan Stanley, Dean Witter & Co. and Lehman Brothers Holdings Inc.
Spitzer was in Washington lobbying for legislation that would prohibit securities firms from paying analysts based on investment banking business they bring in. Spitzer met with Securities and Exchange Commission Chairman Harvey Pitt for about an hour, said Spitzer spokesman Marc Violette.
Spitzer does not want to investigate every major firm's analysts, Violette said. ``We think this would best be addressed by action from Washington,'' he added.
Brokerage Stocks Fall
The 12-member American Stock Exchange Securities Broker/Dealer index fell 3.4 percent today, compared with the 0.7 percent decline in the Standard & Poor's 500 index. Merrill shares fell $2.49, or 5 percent, to $44.65.
``The overriding reason is the Merrill-Wall Street probe,'' said David Katz, who helps manage $825 million at Matrix Asset Advisors Inc. in New York. ``I think that just spooks people.''
Spitzer said he believes the state and federal investigations will force other firms to make changes to reduce the possibility of analyst conflicts. Spitzer wouldn't disclose what his office has learned about practices at other firms and whether he believes problems are widespread.
``If others were to draw those inferences, I would think they'd be fair,'' Spitzer said.
The multi-state investigation involves the North American Securities Administrators Association, which represents the securities regulators for all 50 U.S. states, the District of Columbia and Puerto Rico.
``As a matter of policy, we always cooperate with regulatory inquiries and we'll do so in this case,'' said Merrill spokesman James Wiggins. ``This is not linked just to Merrill Lynch.''
Merrill Lynch is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News.
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