Merrill Lynch e-mails suggest major conflicts of interest

It follows the discovery of internal e-mails alleged to show analysts privately disparaging companies while publicly recommending their stocks.

New York State Attorney General Eliot Spitzer yesterday announced the court order requiring immediate reforms in one of Wall Street’s oldest and largest securities firms which controls total client assets of approximately $1.5 trillion.

According to Spitzer’s office, an investigation has uncovered “dramatic evidence that the firm’s stock ratings were biased and distorted in an attempt to secure and maintain lucrative contracts for investment banking services. As a result, the firm often disseminated misleading information that helped its corporate clients but harmed individual investors.”

Spitzer contends that one analyst made highly disparaging remarks about the management of an internet company in an internal e-mail 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.

Another e-mail shows analysts complaining about pressure from Merrill Lynch’s investment banking division. One senior analyst wrote: "the whole idea that we are independent of [the] banking [division] is a big lie."

The allegations add that e-mails show how individual investors were harmed. A research analyst apparently complained about giving a buy rating to a poor investment: “I don’t think it is the right thing to do. John and Mary Smith are losing their retirement because we don’t want a client’s CEO to be mad at us.”

The court order obtained by Spitzer requires Merrill Lynch to now make disclosures to investors about its relationship with investment banking clients and provide more context for its stock ratings.

Spitzer described the court order as a preliminary step designed to protect investors while the investigation continues. He said his office has issued subpoenas to other securities firms.

Merrill Lynch issued a statement yesterday:

“There is no basis for the allegations made today by the New York Attorney General. His conclusions are just plain wrong. We are outraged that we were not given the opportunity to contest these allegations in court.”

It continued,

“The allegations reveal a fundamental lack of understanding of how securities research works within the overall capital raising process. They cite a limited number of employee e-mails, taken out of context, as ‘proof’ that investment banking had undue influence in determining research ratings. In fact, these emails prove nothing of the sort.

“E-mails are only one piece of a continuous conversation, isolated at a single point in time - not the end conclusion. The e-mails in question show that there was normal give and take as well as vigorous debate among analysts as they assessed different companies. These kinds of interchanges are customary and appropriate. Analysts consider views from a number of different sources, including the companies they are covering and the investment bankers who work with those companies, before drawing independent conclusions. This process is followed throughout the industry and is part of what has made our capital markets the best in the world. As with oral conversation, e-mails may include ill-chosen words and offensive language, but this does not add-up to evidence of wrongdoing.”