Wall Street giant Merrill Lynch & Co. is nearing an agreement that could include a substantial monetary penalty and a more formal separation of its securities analysts and investment bankers to avoid a potentially damaging criminal or civil prosecution by New York’s attorney general, sources familiar with the discussions said.
A deal could come as soon as Thursday.
Discussions about the exact nature of the structural changes were continuing today, sources said. Suggestions have included forming a separate board of outside directors for the research department that would have final say on how the department is organized and managed. Merrill Lynch is likely to agree to disclose in research reports any investment banking relationship the firm has with companies it covers.
But the firm probably will not agree to include information in research reports about investment banking work it is seeking from the companies it covers. That suggestion was dismissed by many as potentially too damaging to Merrill Lynch’s competitive position.
Merrill Lynch also rejected as unworkable an earlier suggestion by New York Attorney General Eliot Spitzer’s office that the firm spin off its research arm entirely. Officials said the company’s research reports generate little revenue and would not support a stand-alone business. The spinoff idea has been dropped, according to people familiar with the negotiations.
A final deal will also probably include a substantial monetary payment by Merrill Lynch. Spitzer’s office had asked for $100 million, to include a fine and payments to small investors who lost money on stocks Merrill Lynch aggressively promoted. One source familiar with the discussions said Merrill Lynch officials were eager to settle and would not let money be a sticking point. But a Merrill Lynch source familiar with the negotiations said a dollar figure had not been discussed and that the issue could still impede a final deal.
A spokesman for Spitzer would not comment on the negotiations. Nor would a spokesman for Merrill Lynch.
The negotiations began last week after Spitzer released internal Merrill Lynch e-mails he said demonstrated that the firm’s analysts regularly issued glowing research reports on companies they privately derided as “junk” and “crap” in order to generate or maintain lucrative investment-banking relationships with the companies. Merrill conceded that the e-mails were embarrassing but said they were being taken out of context.
Spitzer launched his investigation 10 months ago, after technology stocks touted by Merrill Lynch Internet analyst Henry Blodget, along with many other analysts on Wall Street, lost much of their value, vaporizing billions of dollars in investor equity. Spitzer extended the investigation to other Wall Street firms last week.
In his probe, Spitzer is using a little-known provision in state law that gives him wide powers to subpoena and compel testimony from New York securities firms, as well as to pursue both civil and criminal convictions using a relatively low legal standard.
He won a court ruling last week that directed Merrill Lynch to make extensive changes to its research department. The firm gained a stay of that ruling. An agreement is expected to be reached before the stay expires on Friday.
Academic observers said Spitzer’s use of the Martin Act has forced Merrill Lynch’s hand. The law allows Spitzer to secure convictions without proving criminal intent and without any sale or purchase of securities. It is widely considered to be the strongest securities law in the nation. While a conviction is by no means certain, a protracted legal battle with Spitzer could produce further damaging information such as the e-mails released last week.
Meanwhile, Securities and Exchange Commission regulators met with Spitzer today, but no decision was reached on whether the SEC will play any formal role in the New York probe, according to sources familiar with the discussions.