Merrill paying $100 million for misleading investors

Michael Gormley

Tuesday, May 21, 2002 | 10:15 a.m.

ALBANY, N.Y. -- Merrill Lynch & Co. agreed to pay $100 million to settle allegations that the firm's analysts misled investors with their stock ratings so the company could win lucrative investment banking fees.

Merrill Lynch said today it will make the payment to New York state, which has been investigating the matter, and to other states, provided they accept the pact.

The firm made a statement of contrition and agreed to structural reforms to assure that its stock analysts work independently from the firm's investment bankers who do business with some of the same companies.

"This agreement changes the way Wall Street will operate," New York state Attorney General Eliot Spitzer said. "By adopting the reforms embodied in the settlement, Merrill Lynch is setting a new standard for the rest of the industry to follow."

In morning trading on the New York Stock Exchange, Merrill shares were down 3.6 percent, or $1.54 a share, to $44.92.

The investment firm, which is the nation's largest, said the agreement "represents neither evidence nor admission of wrongdoing or liability," a characterization that would fall short of Spitzer's initial insistence on an admission of wrongdoing. An admission of wrongdoing would have helped investors in civil restitution efforts, investors' attorneys have said.

Spitzer had dropped the idea of establishing a restitution fund to allow such individual or class-action civil suits by investors.

Last month, Spitzer revealed details of a 10-month investigation into Merrill Lynch that uncovered e-mails from analysts disparaging stocks that they publicly praised.

He threatened to file criminal charges unless Merrill Lynch agreed to make reforms among its ranks of analysts, pay a fine and admit wrongdoing.

Spitzer said analysts rated stocks of some companies as good buys so the Merrill Lynch could win investment banking business for mergers and initial public stock offerings from those same companies.

Settlement negotiations between Merrill Lynch and Spitzer have been under way since he revealed the findings of his investigation.

Merrill Lynch issued a statement today in which it apologized for "the inappropriate communications brought to light by the New York state attorney general's investigation."

"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 statement said.

David H. Komansky, Merrill Lynch chief executive, and Stan O'Neal, the firm's president, said "Today's result will ultimately benefit all investors and the capital markets."

The Spitzer probe also includes key Merrill Lynch rivals, and the settlement is expected to serve as a model for the industry.

Spitzer has subpoenaed information from at least a half dozen other major Wall Street brokerages. Some of the evidence collected so far includes employment contracts that detail how analysts were to be compensated for helping to land investment banking clients.