Wall St. Awaits Result of Research Probe
By Brian Kelleher
NEW YORK (Reuters) - New York State Attorney General Eliot Spitzer's widening probe into stock research is gathering steam as he negotiates a settlement with early target Merrill Lynch & Co. Inc., but Wall Street is in the dark as Spitzer has kept his future plans to himself.
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Spitzer last month accused Merrill of issuing overly bullish research to woo investment banking business after a 10-month probe uncovered damning e-mails between the firm's Internet analysts. The two sides are working on a settlement, which is being closely monitored by Merrill's peers.
That's because Spitzer's office is sifting through information being gathered from firms including UBS Warburg, Morgan Stanley, Goldman Sachs Group Inc., Salomon Smith Barney and Credit Suisse First Boston as part of a wider probe, according to sources familiar with the matter.
"The key wild card is what kind of communications are found," said Dave Trone, a Prudential Securities analyst. "If there are no smoking guns, I see no reason why a given firm would have to pay anything or settle on any matter."
Spokespeople for the investment banks have declined to comment on Spitzer's probe, which was announced on April 8.
At this point, Spitzer is just gathering information from the other firms and has not indicated how he will proceed, sources at two of the firms said. For now, all the banks can do is wait and hope nothing incriminating is discovered.
"Everyone's sort of waiting," said one of the investment bank sources, speaking on condition of anonymity. "I haven't heard of any overtures from Spitzer."
No firm wants to find itself in the same situation as Merrill, which has lost more than $9.5 billion in market value in a little over a month. Spitzer uncovered e-mails in which Merrill's Internet analysts, including former star Henry Blodget, privately disparaged companies they publicly recommended.
Merrill's rivals may find themselves in the clear -- and at a competitive advantage -- if the wider probe is fruitless. A Merrill settlement could include changes in its research practices -- like tighter restrictions on analyst and banker interaction -- and a large fine.
"The regulatory bodies .... need some proof there was wrongdoing," Trone said. "If Merrill agrees to a change in business practices, the other firms are not going to just simply join with them, they're going to leverage that disadvantage Merrill has."
A Merrill spokesman declined to comment on the settlement proceedings.
Merrill shares were off 55 cents at $43.40 in Thursday afternoon trading on the New York Stock Exchange. The shares are off more than 18 percent since April 8.
Merrill Chief Executive David Komansky and President Stanley O'Neal on Wednesday reportedly defended the combination of investment banking and research under one roof.
Addressing employees in an internal presentation, O'Neal said analysts working with investment bankers is a "part of the capital-formation process," according to a Bloomberg News report. |
