Merrill Lynch Clients Get Better Ratings
Merrill Lynch & Co. confirmed this week what many investors probably suspected: The big brokerage is more bullish on the shares of its corporate investment banking clients than other companies it covers.
Under a new disclosure system negotiated with the New York state attorney general, Merrill revealed that its 500 analysts have a higher proportion of “buy” ratings on stocks of corporate clients than on shares of companies the brokerage hasn’t done business with in the last year.
Merrill analysts rate 26% of clients’ stocks “strong buy” compared with 18% for all the stocks the analysts cover. They rate 40% of clients’ stocks “buy” compared with 36% for all companies.
Merrill is disclosing the ratings distribution as part of its agreement last month with Atty. Gen. Eliot Spitzer. Merrill also agreed to pay a $100-million fine and create a panel to review rating changes to settle Spitzer’s claims that the firm’s analysts misled investors by recommending shares of companies largely or solely to win or retain banking business.
Merrill spokeswoman Susan McCabe declined to comment on the specifics of the ratings distribution. “A part of the analyst’s role is to assist in the capital-raising process by identifying companies and transactions that are appropriate for and will benefit our investor clients,” she said.
Merrill analysts rate 40% of all companies “neutral,” compared with 30% of investment banking clients. Merrill has “sell” ratings on 6% of all companies it follows, compared with 4% of clients’ shares.
Merrill may award better ratings to shares of corporate customers because “it can pick and choose its clients,” said Georgetown University finance professor James Angel. It may agree to underwrite and advise on mergers only companies it believes have the best prospects, he said.
Even so, “at face value, this looks rather suspicious,” Angel said. “Is Merrill tilting their research recommendations in favor of clients?”
When he announced his investigation on April 8, Spitzer released e-mails from Merrill analysts, including former Internet analyst Henry Blodget. The e-mails showed analysts disparaging companies they recommended to investors, and indicated that banking relationships influenced Merrill’s ratings.
Three weeks after Spitzer announced the probe, Merrill agreed to disclose more information about conflicts of interest in its research to avoid charges under New York’s Martin Act, one of the nation’s most powerful anti-fraud laws.
Merrill did not admit wrongdoing in agreeing to settle with Spitzer, but Chief Executive David Komansky told employees last month that the firm was tarnished by Spitzer’s investigation.
