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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: ild who wrote (27383)	2/28/2005 2:57:37 PM
From: ild	Read Replies (1) \| Respond to of 110194

NEW YORK (Dow Jones)--Bucking a spate of previous rulings favorable to the securities industry, arbitrators ordered Merrill Lynch & Co. (MER) to pay a customer more than $1 million for failing to disclose that its analysts had conflicts of interest in recommending stocks. A National Association of Securities Dealers arbitration panel ruled earlier this month that Merrill analysts "were guilty of intentional misconduct" in using a rating system that overvalued stocks they were covering. It ordered Merrill to pay about $731,000 in compensatory damages and $300,000 in punitive damages to Gary Friedman, a medical malpractice lawyer in Coral Gables, Fla., and his wife. The case is significant because the Friedmans relied on analyst recommendations to buy or hold 39 stocks that were not involved in the $1.5 billion research settlement that Merrill and 12 other Wall Street firms made in 2003 and 2004, said Robert W. Pearce, a Boca Raton, Fla., lawyer who represented the Friedmans. In that settlement, New York Attorney General Eliot Spitzer and other regulators said the firms issued overly rosy research on about 50 companies in order to win investment banking assignments. Without admitting or denying guilt, the firms agreed to stop compensating analysts with banking fees and to make them attest to their research opinions. A settlement fund is being established to distribute about $433 million to investors from the settlement money, but groups of plaintiff lawyers have filed arbitration claims on behalf of investors in stocks not mentioned in the settlement. "Nobody's been winning these cases," said Pearce. "What I did different was to remain focused on the conflict of interest, and the fact that it needed to be disclosed rather than trying to show that the research was flawed." He said Merrill did investment-banking work for about two-thirds of the companies in his client's portfolio at Merrill. "There were no facts presented in this case to support the panel's result," said Merrill spokesman Mark Herr. "The claimants' losses, many of which came in blue-chip stocks, were caused by the same thing that caused millions of other investors to lose money between 2000 and 2002: the market plunged. That cannot reasonably be blamed on Merrill Lynch's research." The Friedmans had sought about $4 million representing all their losses in addition to punitive damages, but Pearce said that amount was "unrealistic" since some of the decline represented a general drop in the stock market between April 1999 and June 2002, the period cited in the arbitration. For most of that time, Merrill analysts didn't have a single sell or reduce recommendation on more than 1,350 stocks it covered, according to data Pearce said he presented to the arbitration panel. Once Spitzer's investigation became known, the number of negative opinions rose to more than 3.5% of stocks covered. The three-person NASD panel didn't explain its reasoning, but said it reviewed "clear and convincing evidence" of analyst misconduct. Merrill "employees knew or should have known" that the Friedmans relied, at least in part, on the "skewed" rating system and "were likely to suffer financial harm as a result," it wrote. It also said that Merrill managers "knowingly condoned, ratified and consented to the conduct of its employees." In the earlier settlement from Spitzer and other state and federal regulators, a memo from a Merrill manager was cited that solicited analysts' help in winning investment-banking business. "Merrill never disclosed that research analysts' compensations was related in part to their contributions to investment banking," Pearce said. "Had my client known, he would not have placed as much credence in the research that he was reading." Only days before the arbitration hearing began last month, a federal appeals panel upheld a ruling that tossed out a class-action suit against Merrill that said its clients suffered losses in hundreds of stocks because of fraudulent research. In another NASD arbitration case disclosed last week, Merrill was ordered to pay $188,443 to a New Jersey couple who bought Internet Capital Group Inc. (ICGE) stock based on recommendations from a Merrill analyst, according to the law firm of Stuart D. Meissner that brought the case. Merrill paid $100 million to state securities regulators prior to the Spitzer settlement, and agreed in that pact to spend another $100 million on investor education and independent research. Its former Internet analyst, Henry Blodget, agreed to a separate $4 million payment in the Spitzer-related case. A court-appointed lawyer is currently waiting for approval to distribute about $433 million to investors in about 50 stocks recommended by Blodget and analysts at 11 other Wall Street firms. Stocks that Friedman said he bought, relying solely on Merrill's recommendations, included Agilent Technologies Inc. (A), Cisco Systems Inc. (CSCO), Microsoft Corp. (MSFT) and Lucent Technologies Inc. (LU) as well as such nontechnology giants as Time Warner Inc. (TWX), BellSouth Corp. (BLS), J.P. Morgan Chase & Co. (JPM) and Walt Disney Co. (DIS). The NASD arbitration panel didn't mention specific stocks in its award document.