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SEC Launches Probe Of Analysts

Apr 25, 2002 | UPI

The Securities and Exchange Commission is launching a formal inquiry into potential conflicts of interest between stock analysts and investment banks, the regulatory agency announced Thursday.

The SEC investigation will examine if securities firms such as Merrill Lynch & Co.'s and others had analysts issue favorable research on stocks that the investment side of the firms were currently working with or attempting to work with as clients.

At issue is whether recommendations of certain stocks were unduly affected by a given company's investment banking business.

"This is the next step and a critical one in the commission's yearlong review of analyst practices," said SEC Chairman Harvey Pitt.

The SEC's announcement comes in the wake of a recent court order from the state of New York requiring that the financial services company disclose the relationship between its investment bankers and equity analysts, which resulted from a 10-month investigation of Merrill Lynch by New York Attorney General Elliot Spitzer.

Spitzer met Wednesday with Pitt to discuss potential fraud by Wall Street's investment banks.

The investigation looked at more than thousands of company documents and e-mail, which had been subpoenaed from Merrill Lynch analysts.

The inquiry will be conducted by the SEC, the New York Stock Exchange, the National Association of Securities Dealers, Spitzer, the North American Securities Administrators Association and several states, according to a statement released by the SEC and Spitzer.

"This was a shocking betrayal of trust by one of Wall Street's most trusted names," Spitzer said. "The case must be a catalyst for reform throughout the entire industry."

In particular, New York's attorney general has raised questions about the relationship between Merrill's high-profile Internet and dot-com analyst Henry Blodget and the Merrill's banking business. The court order, signed by state Supreme Court Justice Martin Schoenfeld, takes effect Thursday.

According to Merrill Lynch, there is "no basis for the allegations" and "a fair review of the facts will show that Merrill Lynch has conducted its research with independence and integrity."

"We have been a leader in practices to assure the independence of our highly regarded research group," the New York-based company said in a statement. "The allegations reveal a fundamental lack of understanding of how securities research works within the overall capital raising process."

"They cite a limited number of employee e-mail, taken out of context, as 'proof' that investment banking had undue influence in determining research ratings. In fact, these e-mails prove nothing of the sort," the company added.

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