- The Washington Times - Wednesday, May 22, 2002

Merrill Lynch & Co. yesterday agreed to pay $100 million to settle charges that it touted Internet stocks as good buys for investors to generate lucrative investment banking fees.
In negotiating the settlement with the nation's largest securities firm, New York Attorney General Eliot Spitzer moved out in front of the Securities and Exchange Commission, taking the aggressive action many Democrats say is needed to curb the abuses that arose in the 1990s stock market bubble.
Mr. Spitzer, a Democrat who is running for re-election in the fall, prodded the SEC to join his investigation last month when his probe uncovered internal memos written by Merrill's celebrated Internet analyst Henry Blodgett. In the memos, Mr. Blodgett confessed that he spent most of his time on banking matters and disparaged Web stocks that he was urging investors to buy.
The agreement would prevent such research analysts from being paid for investment-banking work in the future, and set up other fire walls to ensure the advice they give to investors is not influenced by Merrill's efforts to win underwriting fees.
"This agreement changes the way Wall Street will operate severing the compensation link between the research and banking divisions that tainted investment advice," Mr. Spitzer said, and the reforms are needed to ensure small investors once again have confidence in Wall Street.
"By adopting the reforms embodied in the settlement, Merrill Lynch is setting a new standard for the rest of the industry to follow," said Mr. Spitzer, who is continuing to seek settlements with other major brokerages, including Goldman Sachs & Co., Credit Suisse First Boston and Morgan Stanley Dean Witter.
Private analysts were doubtful that the agreement would greatly change Wall Street's investment houses, which will continue to generate the lion's share of their revenue from arranging mergers and acquisitions, underwriting stock offerings and other investment-banking functions.
The SEC, where officials were relieved that Mr. Spitzer did not attempt to preempt broader enforcement action by the agency, issued a statement that the agreement was a good first step consistent with its rules covering stock analysts.
"While this settlement is an important milestone for investor protection, it is not the finish line, and will not preclude our own efforts on behalf of the investing public," said the SEC's director of enforcement Stephen M. Cutler.
SEC officials primarily were concerned that the state attorneys general led by Mr. Spitzer might take action inconsistent with federal rules published earlier this month, creating a patchwork quilt of regulation resulting in uneven protection for investors nationwide.
The agency, which has stressed getting restitution for investors in its own enforcement actions, did not criticize the sizable fine Mr. Spitzer extracted, none of which will go toward reimbursing deceived investors.
About half of the fine will go into New York's treasury and the rest will fill other state coffers under terms of the agreement, which other states had not signed as of yesterday.
"The idea that there's an injury to private investors doesn't link up real well to money going to state government," said Michael DeBow, a Stanford University law professor who said the case has similarities with the huge tobacco settlements obtained by states' attorneys general.
"It's really a state tax" that is likely to be used to fund state projects such as roads and schools and an entirely different political agenda than that of the aggrieved investors, he said.
Mr. Spitzer considered setting up a restitution fund for investors as part of the settlement, but discarded that idea, apparently because determining who would be eligible for refunds would be too difficult a task for the law office, analysts said.
Investors are seeking reimbursement in a couple dozen lawsuits filed against Merrill, and yesterday's agreement may add weight to their case.
But in announcing the deal, Merrill executives stressed that they are not admitting any wrongdoing. They said they are only agreeing to strengthen the fire walls already in place between their different businesses.
"Our objective from the start has been to reinforce investor confidence in the way securities analysts conduct their research and make investment recommendations," said Merrill Chairman David H. Komansky and President Stan O'Neil.
"We believe this establishes a new industry standard for independence and objectivity of research."
The Merrill executives did apologize for the "inappropriate" comments in their analysts' e-mail, which they said did not represent the company's views.

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