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N.Y. Plans To Query Analysts In Public

Apr 9, 2002 | The Washington Post Former and current analysts at Merrill Lynch & Co. will be publicly interrogated in the coming months as part of an expanding state investigation into allegations that Wall Street's stock analysts misled investors to promote companies that paid fees to the investment bank, officials said today.

Under an obscure provision of New York securities law, state Attorney General Eliot Spitzer will require former Merrill Lynch star Henry Blodget and other Internet analysts to testify under oath about the stark contrast between their rosy public reports on the companies and their sometimes damning private remarks.

In thousands of e-mails and documents, the Merrill Lynch analysts sometimes derided as "junk" and "crap" the very stocks they were promoting with encouragement from investment-banking colleagues, according to documents delivered to court on Monday. Spitzer contends that those e-mails show that analysts, who were purported to offer independent advice, were misleading investors.

John Coffee Jr., a Columbia University professor of corporate law, likened the approach to congressional hearings that are likely to serve as "ceremonial humiliation" for Merrill Lynch and other banks.

Officials at Merrill Lynch declined to comment today. On Monday, the bank denied Spitzer's allegation in a prepared statement and said his conclusions "are just plain wrong." One person familiar with the situation said Merrill Lynch officials believe that testimony taken from current and former employees supports their contention that the e-mails were taken out of context.

Spitzer elaborated on his plans in an interview the day after a judge prohibited Merrill Lynch from issuing research reports unless the bank discloses the investment banking-relationships it has with report subjects. A hearing on the judge's order is scheduled for tomorrow.

Spitzer said the investigation, which began last summer, will include other investment banks, whose records he has subpoenaed in recent weeks. He declined to identify them.

He said he plans to use testimony from the hearings to build a case for stricter federal regulations on potential conflicts of interest in the investment world.

"We need more than investment banks saying 'we will build better compliance departments,' " Spitzer said.

Spitzer is using a provision of the state's Martin Act, one of the oldest and toughest securities laws in the nation. It provides wide latitude to conduct legislative-style hearings to gather evidence of securities fraud.

The case adds to growing scrutiny of Wall Street practices. They were criticized after the Internet investment bust two years ago and again more recently when Enron Corp. collapsed while many analysts still rated its stock a "buy."

On Monday, stockholders who lost billions of dollars when Enron declared bankruptcy added Merrill Lynch and several other investment banks as defendants in lawsuits, charging that they directly helped the Houston energy trader defraud investors.

Congress is examining the analysts' role in the Enron case.

"Misleading advice that may result from widespread conflicts of interest between investment banks and their stock analysts appears to be rampant," said Sen. Joseph I. Lieberman (D-Conn.), chairman of the Senate Governmental Affairs Committee, who conducted hearings on the role of analysts in the Enron debacle.

"Unfortunately in this environment, investors must be very cautious in heeding the advice of Wall Street analysts," he said.

"It is a very real problem," said Rep. James C. Greenwood (R-Pa.), chairman of a House investigating subcommittee, who is considering legislation that would mandate much broader disclosures of investment-banking ties. "There is no doubt about the fact that research is used as a marketing tool by investment banks, and that puts investors potentially at risk."

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