New York Attorney General Eliot Spitzer has obtained a court order requiring investment firm Merrill Lynch to disclose to investors the nature of its relationship with investment banking clients and provide more context for its stock ratings.
The New York State Supreme Court order requires Merrill to disclose in its investment research whether it has retained the company as an investment banking client or is trying to win its business.
The order followed a 10 month investigation by the AG’s office into how the securities giant and other Wall Street firms made recommendations of stocks, especially Internet-related and technology stocks. Spitzer said the investigation into Merrill concluded that the firm’s investment advice was tainted and biased by the desire to aid Merrill’s investment banking business.
As a result, the AG said, the firm often disseminated misleading information that helped its corporate clients but harmed individual investors.
Spitzer outlined the order Monday, and released details of internal e-mail communications between investment bankers, analysts and their superiors at Merrill that he obtained as part of his investigation.
“These communications show analysts privately disparaging companies while publicly recommending their stocks. For example, one analyst made highly disparaging remarks about the management of an internet company and called the company’s stock ‘a piece of junk,’ yet gave the company, which was a major investment banking client, the firm’s highest stock rating.”
Comments analysts made internally about stocks which had been recommended, according to the court order, include the following: 24/7 Media (NASDAQ:TFSM)(“piece of s—“); GoTo.com (NASDAQ:GOTO)(“nothing interesting about company except banking fees”); Excite@Home (NASDAQ:ATHM)(“such a piece of crap”).
One of the trails in the investigation leads to Henry Blodget, the former Internet analyst for Merrill who has since left the bank. Blodget provided bullish ratings on Internet companies such as GoTo.com, InfoSpace, iVillage, 24/7 Media and Pets.com, which later collapsed in value when the tech bubble burst.
In December, the AG’s office confirmed it was investigating Blodget over conflicts of interest in how he recommended Internet stocks.
The AG’s office said other internal communications showed analysts complaining about pressure from Merrill Lynch’s investment banking division. “For example, a senior analyst writes: ‘the whole idea that we are independent of (the) banking (division) is a big lie.'”
Spitzer said the e-mail communications showed that the problems at Merrill went far beyond a single analyst or research unit. “For example, the head of the equity division wrote to analysts: ‘We are once again surveying your contribution to investment banking … please provide complete details on your involvement .. paying particular attention to the degree your research played a role in originating ….'”
Merrill issued a statement calling Spitzer’s conclusions “just plain wrong. We are outraged that we were not given the opportunity to contest these allegations in court.”
The ongoing investigation into “tainted” investment recommendations includes other Wall Street firms, which have reportedly been served subpoenas by the AG’s office, though Spitzer didn’t identify which.
Calling the investigation results a “a shocking betrayal of trust by one of Wall Street’s most trusted names,” Spitzer said the Merrill case must be a catalyst for reform throughout the entire securities industry.
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