Merrill Aims to Settle Analyst Probe
By Brian Kelleher
NEW YORK (Reuters) - Merrill Lynch & Co. Inc. (NYSE:MER - news) is racing to settle accusations its stock research has been biased and overly bullish, aiming to avoid criminal charges that could devastate the investment bank, two sources familiar with the matter said on Tuesday.
Merrill, which has been accused by New York State Attorney General Eliot Spitzer of tailoring its stock research to woo lucrative investment banking business, is trying to reach a final settlement to head off a court hearing that would involve testimony by Merrill executives
The hearing was originally scheduled for this Thursday, but the New York Attorney General late Tuesday moved the hearing date to May 16 due to "productive discussions" between the parties, a Merrill spokesman said. This gives Merrill and Spitzer another week to broker a settlement, although the hearing date is not meant as an absolute deadline, a source close to Merrill has said.
Criminal charges -- something which Spitzer hasn't ruled out -- would be the equivalent of a death sentence for any financial company, making Merrill especially keen to settle. Other Wall Street firms may follow, as Spitzer has subpoenaed most of Merrill's rivals and has expanded the probe to include overseas banks like Switzerland's UBS AG (UBSZn.VX) (NYSE:UBS - news) and Credit Suisse Group (CSGZn.VX) (NYSE:CSR - news).
"It has always been clear that a Wall Street firm cannot operate under criminal indictment, as it would threaten funding in the marketplace and lead to the retreat of trading counter-parties," Salomon Smith Barney analyst Guy Moszkowski said in a research note on Tuesday.
Spitzer's probe uncovered damning e-mails between members of Merrill's Internet group, including former top Web analyst Henry Blodget. The analysts privately disparaged the companies they touted in their research reports, which could be construed as fraud under New York state securities regulations.
Even if Merrill can successfully settle with New York's Spitzer, the firm, its Wall Street rivals, and their stock analysts still face a raft of individual lawsuits alleging they misled investors with bullish calls on questionable stocks.
TOP MERRILL EXECS MAY TESTIFY
Merrill, which has agreed to eventually disclose all potential conflicts of interest on its research reports, is in talks with Spitzer on a final settlement.
The two sides are discussing potential payments and structural changes to Merrill's research department, and Spitzer hasn't ruled out criminal charges if they don't reach an agreement.
A criminal indictment would cast a pall on a financial institution's business. The one-count obstruction indictment against Andersen helped accelerate the exodus of clients from the one-time auditor of bankrupt energy trader Enron Corp. (Other OTC:ENRNQ.PK - news; NYSE:ENE - news) and sped up the firm's disintegration.
"Thus, we believe it is highly unlikely that either party would allow such a point to be reached and will instead favor a settlement, probably relatively quickly," Moszkowski said.
Merrill shares closed down 21 cents at $40.80 on the New York Stock Exchange. The stock has fallen more than 20 percent since Spitzer unveiled the findings of his 10-month probe on April 8.
Shares of rivals Morgan Stanley (NYSE:MWD - news) were off 15 cents at $44.90, while Goldman Sachs Group Inc. (NYSE:GS - news) shares were down 31 cents at $74.85.
If Merrill and Spitzer don't resolve the matter by Thursday, May 16, the two sides will likely meet in state court. Spitzer will request depositions from Merrill, including its head of research, Deepak Raj, and its former star Internet analyst, Henry Blodget, an attorney general spokeswoman said.
Spitzer will also subpoena Andrew Melnick, Merrill's former head of research and now co-head of research at rival Goldman Sachs Group Inc. (NYSE:GS - news), according to the Financial Times Web site. The attorney general spokeswoman declined to comment on Melnick.
A Merrill spokesman declined to comment on the matter.
BANKS ROILED OVERSEAS
Merrill's plight has roiled other U.S. investment banks and even those overseas, as Spitzer has subpoenaed units of UBS and Credit Suisse First Boston.
Moody's Investors Services on Monday afternoon said it would cut the credit ratings of Merrill and its rivals if they were brought up on criminal charges.
UBS shares traded off 1.95 percent in Zurich, while shares of Credit Suisse were down 2.39 percent. Credit Suisse was getting hit particularly hard because of a Monday newspaper report that its analysts were paid for working on specific investment banking deals, analysts in Europe said.
"That is placing extra pressure on its shares because it is more evidence for the regulators to look at," said Georg Kanders, an analyst at WestLB Panmure.
One senior European banker, speaking on condition of anonymity, told Reuters those types of compensation arrangements were once common practice. |
