Merrill Lynch agrees to e-mail monitoring and pays $100 million

The firm, one of Wall Street’s oldest and largest securities firms which controls total client assets of approximately $1.5 trillion, was charged with misleading investors by promoting certain stocks to please its investment banking clients.

Leaked internal e-mails revealed that analysts were publicly rating some dot.com stocks as recommended buys while internally rating the same stocks as “crap”. One senior analyst wrote in an e-mail obtained by Eliot Spitzer: "the whole idea that we are independent of [the] banking [division] is a big lie."

The settlement avoids a criminal trial and represents neither evidence nor admission of wrongdoing or liability. However, in addition to the monetary payment, the firm has undertaken to implement:

• A complete separation of the evaluation and determination of research analyst compensation from the investment banking business, to be achieved through a number of new policies. Research analysts will be compensated for only those activities and services intended to benefit Merrill Lynch's investor clients.
• Creation of a new Research Recommendations Committee to review all initiations of and changes to stock ratings for objectivity, integrity and a rigorous analytical framework.
• Appointment of a compliance monitor who, for a period of one year, will ensure compliance with the agreement.
• A new system to monitor electronic communications between investment bankers and equity research analysts.

The settlement has not prevented civil lawsuits against the firm. The revelations contained in the e-mails released by Spitzer prompted the raising of a class action against Merrill Lynch and its internet analyst Henry Blodget by investors in search engine company GoTo.com.

In a case launched yesterday, investors allege that on the day of giving the company a positive rating, Henry Blodget admitted in an e-mail that there was “nothing interesting about GoTo except banking fees.” The lawsuit also claims that the firm deliberately downgraded a GoTo competitor. When GoTo took its underwriting business to another bank, the lawsuit claims that Merrill Lynch downgraded GoTo in retribution.