Merrill Lynch agrees to $100 million fine

NEW YORK Merrill Lynch Co. will pay a $100 million civil penalty under a wide-ranging agreement settling charges that the company misled investors with "tainted" stock research, the New York State attorney general's office said Tuesday. . A core issue of the allegations was whether Merrill analysts were being "truthful and fair" in their public pronouncements on stocks of companies for which the firm did investment banking business, the office said. . The agreement has broad implications for the way business is done on Wall Street. Attorney General Eliot Spitzer's office is investigating seven other big firms, including Credit Suisse First Boston, Morgan Stanley Dean Witter and Goldman, Sachs. . Under the agreement, in which Merrill admitted to no wrongdoing, the firm agreed to enact "significant and immediate reforms that will further insulate securities research analysts from undue influence from its investment banking division," Spitzer's office said in a statement. It will also change the way analysts are compensated. . "This agreement changes the way Wall Street will operate - severing the compensation link between the research and banking divisions that tainted investment advice," Spitzer said. . At a news conference Tuesday, Spitzer said his office would continue to pursue its investigation into every other major investment house on Wall Street that provides both banking investment and research analysis to the public. . "We believe that until the types of reforms that we have outlined today - that we have reached an agreement on with Merrill Lynch - until those reforms become an industry standard, we will not have reformed the entire industry," Spitzer said. "That is what we seek to do." . He added: "There has been too much improper tainted advice over the past few years on Wall Street. Today is the first significant step forward." . The attorney general also made it clear that pending class-action suits and individual claims seeking restitution would go forward, in legal action that he said had been determined by analysts to be "possibly in the magnitude of several billion dollars in terms of potential exposure." . The $100 million penalty would be paid by Merrill "as a statement that they indeed have done wrong," he said. . Spitzer said Merrill would continue to disclose in its reports whether it has received, "or is entitled to receive," any compensation from a covered company for investment banking advice provided over the previous 12 months. . "This is critical so that the inherent conflicts of interest that have existed for so long between the analysis and the recommendations that are being rendered can be viewed through the proper prism," Spitzer said. . Additional charts and graphs will be available so that investors can compare the buy-sell recommendations issued for all companies, not only those issued for companies with which Merrill has an investment banking relationship. . "This contrast will permit a meaningful evaluation of the extent to which that relationship skews and alters recommendations," Spitzer said. . As a further part of the agreement, Merrill has agreed to create a new investment review committee that will approve all stock research recommendations, "with strict standards and independence from investment banking and the analysts themselves," Spitzer said. . A monitor to ensure compliance will be appointed, with the appointment subject to Spitzer's approval. . "By adopting the reforms embodied in the settlement," Spitzer said, "Merrill Lynch is setting a new standard for the rest of the industry to follow." . As part of the agreement, Merrill issued a statement apologizing "to our clients, shareholders and employees for the inappropriate communications brought to light by the New York State Attorney General's investigation." . The statement added: "We sincerely regret that there were instances in which certain of our Internet sector research analysts expressed views that at certain points may have appeared inconsistent with Merrill Lynch's published recommendations." . The firm said the settlement represented neither evidence nor admission of wrongdoing or liability. The statement added that the company would make a civil payment of $48 million to New York State and an additional $52 million to other states, which it did not identify. . "Today's result will ultimately benefit all investors and the capital markets," David Komansky, chairman and chief executive of Merrill, and its president, E. Stanley O'Neal, said in a joint statement. . Shares of Merrill Lynch were trading up $1.16, at $44.54, on the New York Stock Exchange in late trading. . The charges against the company arose out of a 10-month investigation by Spitzer into conflicts of interests among a number of stock analysts on Wall Street. . On April 8, the attorney general obtained a New York State Supreme Court order directing Merrill, the country's biggest brokerage firm, to disclose in its published research whether a company is an investment banking client or a prospective client. . Referring to e-mail messages among analysts, their bosses and Merrill's investment bankers, Spitzer said when the order was received, "This correspondence shows that the people writing stock reports at times functioned essentially as sales representatives for the firm's investment bankers." . Contending that Merrill had misled its brokerage clients to help its corporate clients, Spitzer said the firm's behavior "jeopardizes the integrity of the marketplace." . At the time, Merrill executives said, "His conclusions are just wrong." Later, Merrill agreed to include more details in its research reports about its investment banking relationships with companies it covers. . The firm also agreed to disclose how many of the stocks it covers are rated buys and how many fall into other categories.

May 2002

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