Merrill Lynch, one of the oldest and largest US investment firms, has been ordered to reform its business practices after being accused of giving advice that hurt clients but enriched the company.
New York State-Attorney General Eliot Spitzer said he got a court order after a 10-month investigation showed that Merrill Lynch’s employees lied to clients and recommended stocks that they knew they were probably bad investments.
“This was a shocking betrayal of trust by one of Wall Street’s most trusted names,” Spitzer said.
“This case must be a catalyst for reform throughout the entire industry.”
Lawyers for Merrill Lynch did not immediately return telephone messages seeking comment.
Spitzer said he did not know how much money customers lost because of the 112-year-old firm’s practices, but he said he believes the clients “number in the hundreds of thousands, if not millions”.
Merrill Lynch’s website says it has 900 offices in 43 countries including Australia and controls more than $US1.5 trillion ($2.87 trillion) in customer assets. It says it manages the assets of three per cent of American households.
Merrill Lynch pushed certain companies’ stock, even after it got poor ratings from its own research analysts, because the firm wanted to keep the companies’ lucrative contracts for investment banking services, Spitzer said.
Investors use the analysts’ research information and ratings system to make their investment decisions.
Spitzer said investigators obtained many memos and emails that showed that analysts, whose research was supposed to be independent and objective, were in effect acting as salesmen for client companies.
This was because the pay for analysts was based in large part on their contributions to bringing in investment banking business, the attorney-general said. He said this was contrary to Merrill Lynch’s own written policy.
Spitzer said the fraudulent practices permeated all of Merrill Lynch.
“These were not isolated incidents,” he said. “No one in senior management took steps to fix the problem.”
Today, New York State Supreme Court Justice Martin Schoenfeld signed an order that requires Merrill Lynch to disclose to customers its relationship with investment banking clients and to explain its stock ratings. The order takes effect on Thursday.
Spitzer called the order an “interim” step. He said the investigation is continuing into several other companies and could lead to criminal charges.