The WSJ has pretty much dropped the ball on the MS investigation. The most they've done is dribble stuff like below out a little at a time. I actually am surprised at this--they are generally more conscientious and interesting about stuff like this.
--------AG's Probe Against Merrill Muddies Waters For Wall Street By CHERYL WINOKUR MUNK and LYNN COWAN Of DOW JONES NEWSWIRES NEW YORK -- An action by New York State Attorney General Eliot Spitzer on Monday makes the future even muddier for securities firms' research and investment banking practices. A court order, obtained by Spitzer, against Merrill Lynch & Co. (MER) requires the country's largest brokerage firm to make immediate reforms such as better disclosure about its investment banking relationships and more context for its stock ratings. Spitzer is also considering bringing criminal charges against the firm, which denies the allegations. Since the analyst objectivity issue gained momentum after the dot-com bubble burst, firms have been scrambling to make sure their policies are in compliance with the best practices adopted last summer by the industry's main trade group. Merrill itself revamped its research policies over the summer, to prohibit stock analysts from owning stocks they cover. Merrill also began disclosing, on the front page of all research reports, a statement that it has or may have business relationships, including investment banking ones, with companies mentioned. The firm is also planning to revamp its research this quarter to focus more on GAAP accounting. The Attorney General, however, claims its order Monday requires Merrill, for the first time, to disclose the relationship between its research and investment banking arms. The press release said Spitzer has issued subpoenas to other securities firms, though it did not say which ones. Goldman Sachs Group Inc. (GS), J.P. Morgan Chase & Co. (JPM) both said they had not received subpoenas. Lehman Brothers Holdings Inc. (LEH), Credit Suisse First Boston, Bear Stearns Cos. (BSC), Morgan Stanley (MWD), the Salomon Smith Barney unit of Citigroup Inc. (C) and UBS Warburg wouldn't comment. The immediate impact of Spitzer's action is unclear, but his order includes an application to the State Supreme Court for approval to gather more evidence about Merrill's research practices. If he prevails, it could be very embarrassing for Merrill and other firms, based on the sampling of information Spitzer has obtained so far. According to his investigation , at the same time that Merrill was contemplating a neutral rating on selected stocks, such as Excite@Home Corp. (ATHM), analysts were telling one another that the stock was "such a piece of crap," among other things. Many of the allegations involved former Merrill internet analyst Henry Blodget. In a statement Monday afternoon, Merrill said 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 emails, 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." The attorney general's investigation has been underway since June 2001 and is yet another example of the pressure facing the industry in the wake of the dot-com bust. Spitzer said he hoped his action would prompt regulators, including the Securities and Exchange Commission, to weigh in with proposed changes for the industry. Ultimately, regulators and other may seek to have the firm split its equity research and investment banking businesses, similar to Arthur Andersen's plan to break apart its auditing and consulting businesses, according to Spitzer. It was unclear whether he was referring to just Merrill or the overall industry. Congress is currently studying the thorny issue of analyst objectivity. In addition, The New York Stock Exchange and the National Association of Securities Dealers Inc. have proposed new rules for investment banks. The comment period ends next week. These rules would require additional disclosures of potential conflicts in analysts' research notes. They would require investment banks to clearly state whether they own of 1% or more of the company they are writing about; whether there are any investment banking conflicts of interest at the time a report is issued; and whether any compensation has been paid by a subject company to the investment bank within the last 12 months or is expected within the next three months. ------ Christian
