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Merrill Lynch To Pay $100M Fine

Merrill Lynch & Co. on Tuesday said it had agreed to pay $100 million and change the way it compensates analysts to settle charges it issued misleading stock research to win investment banking business.

The firm said 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.

The statement 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."

"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."

Spitzer had charged Merrill with issuing overly bullish and biased research after his 10-month probe into the No. 1 U.S. brokerage's analysts. Last month, Spitzer released e-mails and other documents showing Merrill analysts — including former star Internet analyst Henry Blodget — privately derided stocks they publicly touted.

The settlement is sure to put pressure on other firms to adopt reforms like decoupling analyst pay from investment banking deals. Spitzer's probe now includes most of Wall Street's biggest firms, including Morgan Stanley; Credit Suisse First Boston, a unit of Credit Suisse Group Inc.; Citigroup Inc. unit Salomon Smith Barney; and Goldman Sachs Group Inc.

In fact, Goldman Sachs Group Inc. on Tuesday said it will review how it pays its stock analysts, and named Gerald Corrigan to the new position of research ombudsman.

Corrigan, who most recently was chief executive of the Federal Reserve Bank of New York, will be available to talk to analysts about potential conflicts of interest.

"By adopting the reforms embodied in the settlement, Merrill Lynch is setting a new standard for the rest of the industry to follow," Spitzer said in a separate statement.

Merrill's total payment — $48 million to New York State and $52 million to settle with all other states — is the largest since CSFB in December paid a reported $100 million to settle federal charges it mishandled initial public offerings.

Merrill said the settlement represents neither evidence nor admission of wrongdoing or liability. By declining to admit wrongdoing, the firm is seeking to guard itself against a raft of class action lawsuits — which could lead to much bigger payments.

"It would have in essence been a death warrant for the company to admit liability," Spitzer said at a Tuesday news conference in Albany.

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

Merrill said it will adopt the following reforms:

  • Separate how it determines analyst pay from investment banking and pay analysts only for activities and services that benefit its investor clients;
  • Create a committee to review all new stock recommendations and rating changes for their objectivity. The committee will be run by private client and institutional sales representatives and be headed by an individual who will be paid based on how Merrill's research picks perform;
  • Create a new system to monitor all electronic communications between bankers and stock analysts; and
  • Appoint a compliance officer who will work for one year to make sure all of the reforms are implemented.
Spitzer's office unveiled the interim results of a probe into Merrill's Internet group in early April. The embarrassing e-mails and documents also indicated that Merrill had compensated its Internet analysts in part based on how much investment banking business they had helped to win.

Spitzer charged that the evidence released showed that Merrill had violated New York state securities law, and he refused to rule out bringing criminal charges against Merrill and its Internet analysts.

The evidence uncovered by Spitzer led other prosecutors and regulators, including the Securities and Exchange Commission, to launch probes of Wall Street research. Spitzer has been backed in his expanded investigation by a 12-state task force of state securities regulators.

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