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Merrill Lynch FraudSometime in 2001, Merrill Lynch was found to have been publicly promoting investments that they had privately damned. It is suspected that these false statements were made to secure investment banking deals with the companies whose stock was being advocated. One of these clients is believed to be deposed energy leader Enron. In 1998, a sequence of events unfolded in which the Merrill Lynch analyst responsible for the downgrade of Enron’s stock appraisal resigned, the stock was upgraded, and the two struck several deals for lucrative stock offerings. New York state Attorney General Eliot Spitzer took the lead in investigating Merrill Lynch’s practices, finally reaching a settlement that included a fine and Merrill Lynch promises to correct the scandalous practices. When did the wrongdoing first come to light? While allegations against brokers have been aired in congressional hearings and on Wall Street for some time, ground may have been broken on the current Merrill Lynch scandal in July 2001, when the brokerage firm was forced to reimburse approximately $400,000 to a former client. The client, Debases Kanjilal, had invested based upon the advice of his personal broker and analyst Henry Blodget. Kanjilal and his lawyer believed they had evidence that Blodget and Merrill Lynch had some interest in the success of the stock, Infospace, Inc. The current case against Merrill Lynch began to gather steam in April 2002. At this point, Spitzer made known that he had evidence – in the form of emails and sworn testimony – that analysts had privately emphasized the unattractiveness of stocks publicly characterized as sure things. What is the current status of the case? Merrill Lynch has thus far incurred little more than a slap on the wrist and a little public embarrassment. The company admitted no wrongdoing, paid a $100 million fine (some experts estimate this as their earnings in a single day), and agreed to take measures to separate the research and investment banking arms of the company – a relationship that had grown far too close, presumably leading employees to pursue personal goals above those of their investors. Insulating the research arm has come in the form of a restructured pay scale in which analysts’ income is more dependent on the performance of their stocks. Experts question how much effect this will really have, so other solutions to the problem – a fairly widespread one on Wall Street – are being explored. So far, no provision has been made for investors trying to recoup losses on stocks that Merrill Lynch advised. |