One Door Closes, Another Opens: Merrill May Face Class Action Litigation
May 21, 2002
By Rick Weinberg
Registered Rep.
Merrill Lynch may have settled its case with New York Attorney General Eliot Spitzer, agreeing to pay a $100 million fine for allegations that it misled investors by recommending stock of investment banking clients while disparaging the companies in house. But Merrill is still open to class action litigation, and as one attorney says, “Merrill may take a billion hit for that.”
Brokers from the firm today say Merrill collectively breathed a “sigh of relief” that the case with the attorney general was settled. But one rep says the firm expected to be hit with a much bigger fine. “Some people in the company were thinking it was going to be about a billion,” he says.
“The punishment is nowhere near as severe as people expected,” says another Merrill rep. “We’re just glad that this is over-at least part of it. Yes, we all know that there will be a class action suit, but the firm had to get this out of the way first, and I know it was a priority for the firm to get this settled. And to do it for $100 million is a bargain. Hopefully, the class action [suit] will be as a easy.”
It won’t be, according to attorneys. “What Merrill did was a shocking betrayal of trust,” says attorney Larry Klayman of the firm KlaymanToskes. “It was disgraceful-and they’ll be paying for this mistake for years to come, not only financially but with the damage done to their image.”
Says Robert Heim, a former SEC enforcement attorney, now with the law firm Meyers & Heim LLP: “It is good that Merrill settled this case. It’s good public relations for it to acknowledge what’s out in the public already. This was an important step in order to move forward.”
Now that Merrill has settled, there is speculation that it will lead to settlement agreements with other firms the attorney general is investigating, such as Morgan Stanley, Salomon Smith Barney, UBS PaineWebber, Credit Suisse First Boston and Goldman Sachs.
Merrill was motivated to settle because the investigation had damaged the company’s reputation, CEO David Komansky told employees two weeks ago.
Merrill also apologized to investors for the “inappropriate communications” brought to the surface.
“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 in a statement. According to the attorney general’s office, Merrill agreed to make a civil payment of $48 million to New York State and an additional $52 million to settle with all other states. Both payments are contingent upon acceptance of an agreement by the 50 states that have joined the investigation.
Merrill says it will no longer pay analysts based on how much investment banking revenue they help generate. The company says it will create a panel to review stock rating changes and appoint a “compliance monitor” for one year.
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