Excerpt from Barrons piece on Merrill Lynch:
Merrill Bombshell Shows Corruption Runs Deep
By Howard R. Gold
New York State's Attorney General, Eliot Spitzer, dropped a
bombshell this week when he got a court order forcing Merrill Lynch & Co.
to disclose in any stock research report it publishes whether it has or is trying
to get an investment banking relationship with the company it's writing about.
The order was the result of a ten-month investigation (launched well before
the Enron scandal broke), which found that "the firm's stock ratings were
biased and distorted" and that Merrill "often disseminated misleading
information" to help corporate clients at the expense of individual investors,
according to a press release issued by Spitzer's office.
Labeling these actions "a shocking betrayal of trust," Spitzer called for "reform
throughout the entire industry." The Wall Street Journal has reported that
Spitzer is investigating "nearly a dozen" major Wall Street firms.
Now, with all the cynicism about Wall Street these days, I suppose I shouldn't
have been surprised. But quite frankly, I was stunned. Maybe it was the focus
on Merrill. I had always thought its huge base of individual investors provided
some check and balance against the rapacious demands of the investment
bankers. Wrong!
But what I found really appalling was a series of internal e-mails that Spitzer
released, in which Merrill analysts, including former Internet superstar Henry
Blodget, disparaged in very graphic terms the same stocks they were
recommending to their retail customers.
The e-mails reveal people who were at times uncomfortable with what they
were doing and who even pushed back against the pressures from their
investment banking division. But they knowingly peddled garbage to Merrill's
retail clients. There's only one word I can use to describe this cynical
misrepresentation: corruption.
When we hear the word "corruption," we usually think of crooked politicians
or cops on the take. But one definition of corruption is "impairment of
integrity, virtue or moral principle." That's certainly the mildest description I
can think of for the disgraceful attitude and behavior the Merrill analysts
demonstrated in the e-mails Spitzer's office released.
One analyst wrote the following about Internet Capital Group, a one-time
e-commerce high-flyer, in October 2000: "We see nothing that will turn this
around near term." The stock was rated 2-1 at the time; 1 (Buy) is Merrill's
highest rating on a scale of 1 to 5.
Internet service provider InfoSpace was dubbed "a powder keg" and "a piece
of junk" while it got Merrill's top 1-1 rating, and portal Excite@Home, rated
2-1, was called "such a piece of crap." Online direct marketer Lifeminders
and 24/7 Media (both rated at least 2) got the ultimate accolade: "POS" or
piece of you-know-what.
"What's so interesting about [GoTo.com] except banking fees????," John D.
Faig, an institutional investor, asked Blodget, in one of those e-mails.
"Nothin," King Henry replied, succinctly.
Whatever happened to these fine companies? Excite@Home was purchased
out of bankruptcy court and merged with portal iWon. InfoSpace, whose
share price soared to 67.50 in May 2000, now changes hands for a buck and
a half. Internet Capital Group, which hit 182.875 on Christmas Eve 1999,
now trades for 60 cents. And 24/7 Real Media, which was almost a $64
stock in January 2000, now fetches 21 cents.
You couldn't buy a Grande and a blueberry muffin at Starbucks for the
combined value of those last three.
Only GoTo.com, now called Overture Services, still trades like a real stock: It
sold at around 25 Thursday.
Judging from the e-mails Spitzer's office released, Merrill analysts and
managers did have some occasional pangs of conscience.
"I think we are off base on how we rate stocks and how much we bend
backwards to accommodate banking, etc.," Steven Balog e-mailed Blodget in
October 2000.
And Kirsten Campbell, an assistant vice president in Merrill's Internet
Research Group, expressed some serious reservations about GoTo.com's
valuation and rating back in November 2000.
"Who are we trying to please by doing a 2-2?," Campbell wrote in one of the
e-mails. "I don't want to be a whore for [expletive deleted] mgmt... We are
losing people money and I don't like it. John and Mary Smith are losing their
retirement because we don't want [a company official] to be mad at us... The
whole idea that we are independent from banking is a big lie... "
Merrill officials did not return our phone calls by deadline. On Monday, the
firm released a statement that said there was "no basis" for Spitzer's
allegations, which it called "just plain wrong." It said the e-mails had been
"taken out of context" and do "not add up to evidence of wrongdoing."
So, what's to be learned from this, besides watching your language in your
e-mails?
Well, first of all, this goes well beyond Merrill . It's a pervasive corruption that
taints the entire "sell side."
During the Internet mania of 1999 and 2000, Money Fever ran high on Wall
Street. It made Sherman McCoy, the 1980s Master of the Universe in Tom
Wolfe's The Bonfire of the Vanities, look like Mother Theresa.
Many sell-side analysts had been towers of jelly long before that, reluctant to
offend corporate managements for fear of losing their precious "access." That
was why Sell recommendations on Wall Street always have been as rare as a
1945 Mouton-Rothschild.
But in recent years the last vestiges of the so-called Chinese Wall between
research and i-banking crumbled, and the money was so huge (Blodget
reportedly earned $12 million in 2001) that hardly anyone could resist. Since
investment research departments don't make money, their integrity was a
luxury the big firms no longer could afford.
So far, the media seem surprisingly blasé about Spitzer's investigation, which I
believe will shake Wall Street to its roots. (The Washington Post's media
critic, Howard Kurtz, called the story "way underplayed.")
Perhaps we're just too close to these people and need them too much to do
our day-to-day work. At Barron's Online we now have a policy that
whenever we quote sell-side analysts, we'll disclose whether they own the
stock and whether their firm has investment banking relationships with the
company they're discussing. CNBC and the Nightly Business Report on PBS
do that, too, and TheStreet.com has for a long time.
But I'm frankly astounded that after everything that's happened, so many print
publications continue to quote these people as if they work for the Brookings
Institution.
They don't. And they don't work for you, either. Although there are thousands
of honest, ethical people who toil on Wall Street -- a good number of them in
investment research -- the culture of corruption at the heart of the big
investment banks has made all too many sell-side analysts, in Ms. Campbell's
inelegant phrase, whores for mgmt. |
