The firm, one of Wall Street’s oldest and largest securities
firms which controls total client assets of approximately $1.5
trillion, was charged with misleading investors by promoting
certain stocks to please its investment banking clients.
Leaked internal e-mails revealed that analysts were publicly
rating some dot.com stocks as recommended buys while internally
rating the same stocks as “crap”. One senior analyst wrote in an
e-mail obtained by Eliot Spitzer: "the whole idea that we are
independent of [the] banking [division] is a big lie."
The settlement avoids a criminal trial and represents neither
evidence nor admission of wrongdoing or liability. However, in
addition to the monetary payment, the firm has undertaken to
implement:
- A complete separation of the evaluation and determination of
research analyst compensation from the investment banking business,
to be achieved through a number of new policies. Research analysts
will be compensated for only those activities and services intended
to benefit Merrill Lynch's investor clients.
- Creation of a new Research Recommendations Committee to review
all initiations of and changes to stock ratings for objectivity,
integrity and a rigorous analytical framework.
- Appointment of a compliance monitor who, for a period of one
year, will ensure compliance with the agreement.
- A new system to monitor electronic communications between
investment bankers and equity research analysts.
The settlement has not prevented civil lawsuits against the
firm. The revelations contained in the e-mails released by Spitzer
prompted the raising of a class action against Merrill Lynch and
its internet analyst Henry Blodget by investors in search engine
company GoTo.com.
In a case launched yesterday, investors allege that on the day
of giving the company a positive rating, Henry Blodget admitted in
an e-mail that there was “nothing interesting about GoTo except
banking fees.” The lawsuit also claims that the firm deliberately
downgraded a GoTo competitor. When GoTo took its underwriting
business to another bank, the lawsuit claims that Merrill Lynch
downgraded GoTo in retribution.
