NYT: Brokers Caught in Cross-Fire In Client Suits Against Merrill
Publication Date: Saturday May 25, 2002
Business/Financial Desk; Section C; Page 1, Column 2
c. 2002 New York Times Company
By PATRICK McGEEHAN
As Merrill Lynch & Company prepares to defend itself in court against angry
investors, the firm's 14,000 brokers are caught in the cross-fire.
Despite agreeing this week to pay $100 million in penalties to New York and
other states, Merrill still faces lawsuits from customers who contend that
they lost money because they were misled by the recommendations of the
firm's analysts. Estimates of Merrill's liability in those cases run as high
as $5 billion and are weighing heavily on Merrill's stock price, which has
dropped nearly 20 percent since April.
Merrill's executives have said that the firm has strong defenses against
civil suits, and they have enlisted the brokers in what David H. Komansky,
the chairman and chief executive, said would be a ''very aggressive
campaign'' to restore confidence in the firm's investment advice.
''Our primary vehicle for regaining the high ground is the behavior of our
employees,'' Mr. Komansky told the brokers on Tuesday. He encouraged them to
talk to customers about the changes Merrill is making to prevent analysts
from being influenced by their investment-banking colleagues.
But there is lingering resentment among some brokers over the investment
recommendations the firm's analysts made during the technology-stock boom of
the late 1990's and of how the firm's executives have defended the analysts.
Some brokers said they interpreted the message from their bosses to be: ''If
anyone is to blame for bad investment advice, it is you.''
Merrill made that point in preparing brokers to field questions about a
lawsuit over the firm's sale of an Internet-stock mutual fund that lost more
than 80 percent of its value before Merrill folded it into another fund last
year. That suit, and another filed on Thursday, contended that Merrill
misled investors by not disclosing the conflicts of interest its analysts
had in recommending stocks in the fund and in helping to promote the fund to
brokers.
Those conflicts were at the heart of the investigation Merrill settled this
week with Eliot L. Spitzer, the New York attorney general. On April 8, Mr.
Spitzer accused Merrill analysts, including its former star Internet-stock
picker, Henry Blodget, of giving falsely positive recommendations of
companies whose investment banking business Merrill wanted to obtain or
keep.
Merrill did not admit any wrongdoing in the settlement, saying it agreed to
pay $48 million to New York and $52 million to the other states so that it
could put the matter behind it. But Merrill's stock did not rebound after
the settlement was announced Tuesday. It ended the week at $42.95, leaving
the aggregate value of Merrill's stock $9 billion lower than it was before
Mr. Spitzer went public with e-mail messages that had analysts appearing to
be disparaging companies in private while recommending their shares
publicly.
''The issue that you have here is we don't know how large the civil
settlements will be when they come,'' said Brad Hintz, an analyst with the
Sanford C. Bernstein unit of Alliance Capital.
In the midst of the uproar over Mr. Spitzer's accusations, Merrill told the
brokers that although Mr. Blodget participated in efforts to persuade them
to sell the fund, he was not recommending it to their clients.
Indeed, an internal memorandum said, the fund ''was never marketed directly
to clients, but to Merrill Lynch financial advisers -- sophisticated
investment professionals -- who manage client accounts and make their own
decisions about the suitability of products for their clients based on a
myriad of factors.''
James Gorman, who runs Merrill's brokerage operation, declined to explain
that position.
James Wiggins, a Merrill spokesman, said that the firm's analysts ''do not
make specific recommendations to specific clients.''
''That's the job of a financial adviser,'' he said. ''It's ultimately
between the financial adviser and the client.''
In another recent discussion with employees, Mr. Komansky said that the
brokers and their clients should keep in mind that they had clamored for the
Internet stocks that are the subjects of the lawsuits. Those sentiments
irked some brokers, none of whom would agree to be identified for fear of
punishment from Merrill.
''There is a sense of betrayal, but it's on two different fronts,'' one
longtime Merrill broker said. ''First, it's that things weren't going the
way they were supposed to be going in the research department, things to
which we weren't privy. There's also a sense of betrayal because the firm is
saying to us, 'Don't forget that if your clients want to take an action
against the firm, they're taking it first and foremost against you.' ''
Securities lawyers said that Merrill might want its brokers to head off
more lawsuits by telling customers that they would have to sue their brokers
as well as the firm. Many investors have a stronger bond with their brokers,
personally, than with the investment firms.
Disputes between individual investors and their brokerage firms usually end
up in an arbitration forum run by the New York Stock Exchange or the
National Association of Securities Dealers, not in court.
''They're putting pressure on the broker, saying, 'If you bring in a
lawsuit, you're going to get named,' '' said John Lawrence Allen, a
plaintiffs' lawyer in Manhattan. ''It's a very, very smart business ploy to
put the poor broker on the front line by saying, 'It's your fault.' ''
Securities laws support Merrill's position that the broker bears the
responsibility for knowing his customers and determining which investments
are suitable for them. But if the opinions that Merrill's analysts gave did
not reflect their true views, as Mr. Spitzer contended, customers who lost
money on those stocks could prevail in court, securities lawyers said.
''Merely because the broker is an intermediary between the research
department and the customer, does not relieve Merrill of the
responsibility,'' Mr. Allen said. ''If the broker parrots what he believes
to be true and it turns out not to be true, then Merrill's responsible.''
While the lawyers sort that out, the brokers are left trying to appease
their clients.
''It's going to take a while for Merrill's retail side to come back,'' Mr.
Hintz said. ''Its customers are standing by on the sidelines of the game
right now. ''
Photo: David H. Komansky, the chief executive of Merrill Lynch. (Fred R.
Conrad/The New York Times)(pg. C4) Chart: ''Bearish on the Bull'' Merrill
Lynch stock remains low despite the agreement that staved off prosecution
earlier this week. Graph tracks Merrill Lynch daily closes from March-May.
MAY 21-- Settlement reached APRIL 8 -- Eliot L. Spitzer, New York attorney
general, charges Merrill with deceiving customers (Source: Bloomberg
Financial Markets)(pg. C1) |
