Top Financial News 05/21 16:33 Merrill, Spitzer Reach Settlement With $100 Mln Fine (Update9) By Stephen Cohen and Philip Boroff
New York, May 21 (Bloomberg) -- Merrill Lynch & Co. will pay $100 million and stop giving investment bankers a say in how much analysts are paid to settle charges by New York Attorney General Eliot Spitzer that the firm's research misled investors. The biggest securities firm by capital will create a panel to review stock rating changes and appoint someone for one year to ensure the firm lives up to the agreement. The agreement may do little to limit the conflicts of interest that led Merrill analysts to recommend shares of clients while privately disparaging the companies, some investors say. "The punishment may not be as severe as people expected," said Bruce Simon, who oversees $18 billion as chief investment officer at Glenmede Trust Co. "I don't think it changes the way Wall Street operates or eliminates the inherent conflict of interest." Merrill shares rose as much as 5.1 percent today. The settlement provides a template for agreements with other firms, said Spitzer, who is investigating Credit Suisse First Boston, Morgan Stanley Dean Witter & Co., Citigroup Inc.'s Salomon Smith Barney Inc. and Goldman Sachs Group Inc. He said the agreement will help restore faith in Wall Street, which has been shaken by the collapse of the Internet and telecommunications stock bubbles. "It is only through real reform that investor confidence will be restored, and this agreement provides real reform," Spitzer said a news conference. The fine is 2.4 percent of Merrill's 2001 operating profit. It's equal to a $100 million payment by CSFB, which was the fifth- largest settlement by a Wall Street firm. Led by Eric Dinallo, Spitzer's head of investor protection, the attorney general's office last year embarked on a broad probe of analyst conflicts. The investigation narrowed to Merrill's Internet group following press accounts of analyst Henry Blodget lowering his rating of Goto.com Inc. after the Internet search engine chose a Merrill rival for the lead role in a stock sale. Spitzer's probe put pressure on Securities and Exchange Commission Harvey Pitt to begin his own investigation, which he announced last month. E-Mails Spitzer, a 42-year-old Democrat who is running for re-election this year, last month cited an e-mail in which Blodget conceded that he spent 85 percent of his time in one week on banking matters. He confessed in another e-mail that "there is nothing positive to say" about Internet Capital Group Inc., a stock he recommended investors "accumulate." Merrill will continue to pay analysts based on banking, but will take into account how the transactions analysts work on perform for Merrill clients. "I see no way that (the settlement) will impact analyst compensation going forward," Komansky said at news conference at Merrill's World Financial Center headquarters. Throughout the negotiations, Spitzer insisted he wouldn't settle with Merrill without changing how analysts are paid. He contends it's a conflict for analysts to be paid to help launch an initial public offering or advise on a merger. Research analysts will continue to accompany investment bankers when they solicit business from potential clients. The analysts will have to get approval from research executives to attend such pitches. A top-ranked analyst helps securities firms win investment- banking business because companies want flattering research reports that will encourage investors to buy shares. Shares, Bonds Rise Merrill shares rose 47 cents, or 1.1 percent, to $43.85 after earlier gaining as much as 5.1 percent. Spitzer won't create a fund to compensate investors who claim they lost millions of dollars because of tainted research, leaving that to class-action lawsuits and private arbitration cases. The firm faces at least 28 class-action lawsuits from investors. Spitzer said requiring an explicit admission of wrongdoing would have been a "death warrant" for the firm. Merrill apologized to investors for the "inappropriate communications" brought to light by Spitzer, which "may have appeared inconsistent with Merrill Lynch's published recommendations," the firm said in a statement. "For Merrill, a $100 million fine, is, as far as I am concerned, an admission of wrongdoing," Spitzer said. Merrill said it would appoint a compliance monitor for one year to ensure the firm is keeping its part of the agreement. The monitor, who hasn't yet been named, may become a permanent position, Komansky said. The firm will also set up a system to monitor e-mail messages between its bankers and analysts. Merrill will highlight the changes, beginning tomorrow, in print advertisements in newspapers, including the New York Times. Paying States Merrill agreed to make a civil payment of $48 million to New York State and an additional $52 million to settle with all other states. Both payments are contingent on acceptance of an agreement by the 50 states that have joined Spitzer's probe. "We will continue to pursue an inquiry with respect to every other major firm," Spitzer said, adding that Merrill competitors "should come and have a forthright conversation with us," and look at the settlement "as a template." Credit Suisse First Boston, Morgan Stanley, Goldman, Salomon Smith Barney, UBS AG's Paine Webber Group Inc. and Bear Stearns Cos. received subpoenas from Spitzer. "The whole industry wants to put this issue behind it," said Mark Bronzo, a money manager who invests in securities firms at Groupama Asset Management. Merrill, which lost $11 billion in market value in the month after Spitzer's investigation was announced on April 8, wants to head off future lawsuits from regulators. The firm was motivated to settle because the investigation damaged the company's reputation, Komansky told employees two weeks ago. Drexel Burnham Lambert paid the largest fine, $650 million in 1988, followed by Prudential Securities, $371 million in 1993; Paine Webber, $332.5 million in 1996; and Salomon Brothers, $290 million in 1992. Goldman Sachs responded today by appointing E. Gerald Corrigan, former chief executive officer of the Federal Reserve Bank of New York as an ombudsman to prevent conflicts of interest among its analysts. "What we're doing is pretty consistent with what the attorney general is getting from Merrill Lynch," said Goldman Vice Chairman Robert Steel. Spitzer has requested information from the firm, he said. "It's not smart for me to speculate on what might happen," Steel said. "We feel like we're on the right track." Morgan Stanley and Credit Suisse First Boston declined to comment. A Bear Stearns spokesman didn't respond to requests for comment. A Salomon Smith Barney spokeswoman said the firm will look at ways to further "investor confidence." UBS Warburg said it has a "independent research committee" reviewing its ratings changes and initiations of coverage. Stephen Cutler, the SEC's director of enforcement, called the settlement "an important milestone for investor protection," and added "it is not the finish line, and will not preclude our own efforts on behalf of the investing public." Merrill is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News.
