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Merrill Lynches Conflicted Analysts

By® Staff

Originally Posted

Everyone on the same page.

Towing the corporate line. Speaking with one voice.

[In other usages, most folks prefer "toeing the line" ... but that's a discussion for our Words Guy.]

It's a corporate executive's dream. But it has become a nightmare for Merrill Lynch & Co., which nervously awaits a formal Securities and Exchange Commission inquiry into conflicts of interest brought about by emails from two analysts who worked for the stock market behemoth.

In email messages released by the New York Attorney General, the analysts privately disparaged stocks they had formally recommended on Merrill Lynch's behalf, leading to questions of fraud. In one message, former Merrill Lynch Internet analyst Henry Blodget called one of Merrill's recommended companies "a disaster, ... a piece of junk." "There really is no floor to this stock," he said, while simultaneously giving the company, which happened to be a major Merrill Lynch investment banking client, his highest rating.

Did the company issue unfounded favorable research as a ploy to attract or retain the investment banking business of the touted companies? Or were the messages just the thoughtless ramblings of dunderheaded analysts with too little to do? It may be a clue that the broker's analysts were tasked with -- and compensated for -- recruiting new investment banking customers.

The industry is considering new rules involving disclosure, conflicts, and compensation, prohibiting analysts from being paid with revenue from the investment banking side of the house.

Merrill CEO David Komanski said he regretted the emails. We'll bet he did!

[Full disclosure: The author uses Merrill Lynch's brokerage services. For now.]
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