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Merrill Lynch, NY Reach $100M Settlement

May 21, 2002 | UPI Merrill Lynch & Co. reached a settlement Tuesday with New York state Attorney General Eliot Spitzer on charges the Wall Street firm misled investors with biased research on the stocks of the company's investment banking clients.

Merrill's agreement sets the stage for possible settlements in ongoing investigations and reforms at other firms.

Merrill and other Wall Street firms make a large a part of their income from handling client companies merger and acquisitions and from selling the equities of those clients, which creates the potential for swaying stock analysts who rate these clients to provide overly optimistic reports. At question in the New York investigation, and similar ongoing investigations, is whether investors were give inaccurate information.

The Merrill Lynch settlement requires a $100 million civil payment by the firm and various operational changes to ensure a greater separation -- what is known as the "Chinese Wall" -- between the research and investment banking sides of the business.

"This is a significant amount of money for any company, and it will send a message ... that this type of behavior is unacceptable," said Spitzer of the various Merrill Lynch stock research and rating practices that had been under investigation.

Spitzer's office has also been conducting ongoing investigations of other leading investment banks, including Salomon Smith Barney and Morgan Stanley.

Merrill said research analysts would be compensated for only those activities and services intended to benefit investment clients.

"Real reform is the key to restoring investor confidence," Spitzer said. "This agreement changes the way Wall Street will operate, severing the compensation link between the research and banking divisions that tainted investment advice."

According to the New York Attorney General's office, the agreement settles all aspects of the state's inquiry into Merrill Lynch practices and all present and former employees. The inquiry centered on Merrill Lynch's Internet sector securities research and reporting from 1999 to 2001.

Under terms of the agreement, the settlement represents neither evidence nor admission of wrongdoing or liability, but requires Merrill Lynch to make a civil payment of $48 million to New York state, and an additional $52 million to settle the matter with all other states -- with both payments contingent on acceptance of the agreement by all states.

"Because our many employees work day after day to place our clients' interests first, resolution of this matter is very important to us. Today's result will ultimately benefit all investors and the capital markets," David H. Komansky, Merrill Lynch chairman and chief executive officer, and Stan O'Neal, president and chief operating officer, said in a joint statement.

"Our objective from the start has been to reinforce investor confidence in the way securities analysts conduct their research and make investment recommendations. The actions we are taking will ensure that analysts are compensated only for activities intended to benefit investors. We believe this establishes a new industry standard for independence and objectivity of research," they said.

"Merrill Lynch has always had policies and procedures in place to protect the integrity of our research analysts. Our good faith negotiations with the attorney general have resulted in further actions to strengthen the firewalls between research and investment banking, and also enhance disclosure of the multiple relationships that a company like Merrill Lynch has with clients who issue securities as well as those who invest in them," Komansky and O'Neal said.

The firm also will create a new Research Recommendations Committee to review all initiations of and changes to stock ratings for objectivity, integrity and a rigorous analytical framework.

Merrill Lynch said the RRC would include representatives of private client and institutional sales management, research management and research strategists. It is to be headed by an individual who will be paid primarily based on the performance of search recommendations for investors.

Merrill Lynch also plans to appoint a compliance monitor who will ensure compliance with the agreement for one year and implement a new system to monitor electronic communications between investment bankers and equity research analysts.

Merrill Lynch said its equity research reports would contain added disclosures that might reveal any potential conflict of interest regarding the companies covered by Merrill research analysts.

Komansky and O'Neal noted the company was "pleased to put this matter behind us in a way that seriously addresses investor concerns. We believe strongly in the integrity of our research, which has served investors well for many decades. At the same time we have apologized for any unprofessional behavior.

"Looking ahead, we intend to vigorously implement these new policies and reassert our traditional position as a valued source of information for investors," their statement said.

Immediately following the settlement announcement, Marc Beauchamp, executive director of the North American Securities Administrators Association issued a statement that said, "New York Attorney General Eliot Spitzer performed a public service by highlighting the issue of analysts' conflicts of interest.

"The action he brought and its settlement today will serve to strengthen investor confidence and lead to a fairer marketplace," Beauchamp said. "This historic agreement is the result of weeks of intense and difficult negotiations and many thousands of man-hours of painstaking effort by the Attorney General's Office. We think it's a good settlement and will be urging members to carefully consider it and will recommend they sign on to it."

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