Merrill may just have buried itself
Evidence from Spitzer probe will trigger lawsuits
nationalpost.com
Diane Francis
Financial Post
In my 20 years as a business journalist I have never seen such an immoral, and serious, case as the one settled last week between Merrill Lynch Inc. and the New York State Attorney General. It is simply the tip of an iceberg that will see many Wall Street players put out of business or go to jail.
The evidence is so egregious that there's no doubt that class-action lawsuits will bury the firm and its partners. What follows, if they all are proven to be fact, are examples contained in the affidavit by Eric Dinallo, chief of the investment protection bureau and counsel to Attorney General Eliot Spitzer. The SEC is investigating.
- "At times, officers of clients or prospective clients were allowed to redraft their own coverage [Merrill research reports about them], write quotations in which the analysts would tout their companies, and indicate which ratings would be acceptable to them," according to the affidavit.
- Stock ratings were misleading and "did not reflect the analysts' true opinions of the companies."
"As a matter of undisclosed internal policy no 'reduce' or 'sell' recommendations were issued" and the company "failed to disclose to the public that ratings were tarnished by undisclosed conflicts of interest. Analysts were neither objective nor independent."
- Between spring, 1999, and fall, 2001, Merrill never published a single "reduce" or "sell" on any stock covered by the Internet group. Instead of issuing "reduce holdings," or "sell," recommendations, the research department would merely stop covering the stock "without any announcement or meaningful explanation to the retail public."
"Previously covered stocks such as Pets.com, Mypoints.com, Quokka sports, Webvan, iVillage, Buy.com, 24/7 Media, E-Toys, Internet Capital Group and InfoSpace plummeted, sometimes all the way to zero but retail customers and the investing public were never advised to sell," according to the affidavit.
- It then cites e-mail evidence:
On July 13, 2000, Merrill issued its highest "buy" recommendation (1-1) for InfoSpace even though at the time an internal e-mail by the chief of its internet analytical group, Henry Blodget, described the stock as "a powder keg, given how aggressive we were on it earlier this year and given the bad-smell comments that so many institutions are bringing up." Then on Oct. 20, 2000, he wrote that it was a "piece of junk." It was at 1-1 at the time.
Another case involved Internet Capital Group Inc., a Merrill underwriting client, which had a 2-1 or "accumulate" recommendation even after it closed at US$15.69 on Oct. 4, 2000, down from a high of US$212 on Dec. 22, 1999. On Oct. 5, 2000, it closed at US$12.38 and that day Mr. Blodget sent an internal e-mail that forecasted the price was "going to US$5," adding there is "no helpful news to relate I'm afraid. This has been a disaster ... there really is no floor to the stock."
"Despite this pessimistic outlook, Internet Capital was on Merrill Lynch's list of the top 10 technology stocks as late as Sept. 12, 2000," said the affidavit. It was only slightly downgraded that November.
- Lifeminders, a "buy" recommendation, on Dec. 4, 2000, was described internally by its analyst as a "POS [piece of s--t]." So was a recommended stock named 24/7 Media on Oct. 10, 2000.
- Excite @home on Dec. 27, 1999, had an "accumulate" rating but analysts wrote internally: "We are neutral on the stock." On Dec. 29, 1999, another e-mail described its six-month outlook as "flat" and without any "real catalysts" for improvement seen. By June 3, 2000, it was described as "such a piece of crap" and yet no "sell" recommendation was issued.
- GoTo.Com was a telling example as to how the underwriting department battled with analysts. In January, 2001, an institutional investor e-mailed Mr. Blodget asking, "What's so interesting about GoTo except banking fees?" Mr. Blodget responded: "Nothin."
Analyst Kirsten Campbell e-mailed that the company had terrible numbers and that she did not "want to be a whore for f---ing management" by starting its ranking at 2-2 (accumulate). "If 2-2 means that we are putting half of Merrill retail into this stock because they are out accumulating it then I don't think that's the right thing to do. We are losing people money and I don't like it. John and Mary Smith are losing their retirement because we don't want Todd [Tappin, the demanding chief financial officer of GoTo.com] to be mad at us."
The affidavit pointed out that Mr. Blodget's compensation went from US$3-million to US$12-million in one year mostly due to his portion of underwriting fees.
Little wonder that Merrill also announced with the settlement that the compensation system for its analysts would in future be based on how well stock picks performed rather than on underwriting fees.
"We sincerely regret that there were instances in which certain of our Internet sector research analysts expressed views that at certain points may have appeared inconsistent with Merrill Lynch's published recommendations," the company said in its May 21 press release about the settlement.
But stay tuned. The Attorney General is also investigating Morgan Stanley, Credit Suisse First Boston, Salomon Smith Barney and Goldman Sachs Group Inc. |
