Merrill's Discussions With Spitzer Hit a Snag Over Analysts' Roles
By: Charles Gasparino, Staff Reporter of The Wall Street Journal
NEW YORK -- Negotiations to settle a wide-ranging investigation by New York Attorney General Eliot Spitzer into the research practices of Merrill Lynch & Co . (MER) hit a new snag in recent days over whether analysts at the big Wall Street firm can continue to accompany investment bankers and make pitches to win investment-banking deals
from corporate clients, people with knowledge of the matter said.
In addition, a key factor impeding negotiations has become analyst compensation and whether Merrill will continue to pay its researchers out of its investment-banking fees, people close to the negotiations say.
The firm continues to insist that analysts must play some role in investment banking, people close to the talks say. Maybe more importantly, Merrill wants to continue to pay its analysts at least in part out of a pool of money that includes investment-banking fees, these people add. Mr. Spitzer, meanwhile, has said completely severing the link is a condition of any settlement with the firm, people close to the negotiations say.
The disagreements over these issues have caused the negotiations between the two sides to drag on for several weeks with little if any signs -- at least for the moment -- that a deal can be worked out soon, people close to the matter say.
Just days ago, Merrill Chief Executive David Komansky said negotiations between the two sides were continuing and that he expected the firm would soon reach a settlement. In fact, people close to the negotiations had expected Merrill's top two executives, Mr. Komansky and President E. Stanley O'Neal, to present a settlement proposal possibly as early as this week.
But the latest trouble could prolong the talks indefinitely and, in the end, could cause the attorney general to hold public hearings on the Merrill investigation -- and call various present and former executives as witnesses -- as well as possibly charging the firm with violations of New York law over allegations that it misled investors with overly optimistic research.
Mr. Spitzer has said he is considering filing civil and/or criminal charges against Merrill for misleading investors with overly optimistic research on companies that have paid the firm big investment-banking fees. Mr. Spitzer last month presented what he called compelling evidence to support his case: numerous e-mails from Merrill executives, showing that analysts often harbored private doubts about stocks that received higher public ratings.
Merrill has said that the e-mails were taken out of context, and it denied the charges as it continued to negotiate a settlement with Mr. Spitzer's office.
But in recent days, Merrill has refused to budge on a key demand by Mr. Spitzer: that the firm completely sever the link between its investment bankers and its analysts, and that analysts can no longer make sales pitches with investment bankers who are looking for corporate finance work. Mr. Spitzer has said the link between research and investment banking -- in which analysts are paid in part for helping bankers win deals -- creates biased research, people close to the matter have said.
During the negotiations, Rosemary T. Berkery, Merrill's executive vice president and general counsel, has steadfastly argued against such a prohibition, saying it puts Merrill at a competitive disadvantage with other Wall Street firms, according to people with knowledge of the negotiations. Executives at other Wall Street firms also say they will also fight to allow bankers and analysts to pitch clients because they believe it allows the analysts to get better acquainted with the company.
A spokesman for Mr. Spitzer declined to comment on the details of the negotiations, but added: "The attorney general is adamant on severing the link between investment banking and analysts. If you're paid to promote a stock, you can't be considered unbiased."
Another sticking point involves just what type of apology Merrill will have to make as part of a settlement. Last week, the big Wall Street firm thought it had fulfilled this requirement when Mr. Komansky said publicly that the "e-mails that have come to light are very distressing and disappointing to us. ... They fall far short of our professional standards and some are inconsistent with our policies."
But Mr. Spitzer appears to want a broader apology that addresses the firm's research process, another demand that at least for the moment, Merrill isn't willing to meet.
A spokesman for Merrill declined to comment Friday.
-Charles Gasparino, The Wall Street Journal; 212-274- |
