No Money From Deal for Investors
Individual investors got no money from Merrill Lynch & Co.’s settlement Tuesday with the New York attorney general, nor an admission of wrongdoing to help them recover losses on technology stocks recommended by Merrill analysts. But their arbitration claims and class-action lawsuits still may yield huge damages, experts said.
Merrill’s payment of $48 million to New York and $52 million to other states is a fine, not restitution for investors, although New York Atty. Gen. Eliot Spitzer said he supports investor lawsuits and believes evidence turned up by his investigation will help them. Still, Spitzer made it clear investors will have to fight their own battles if they want to prove they lost money by relying on Merrill research that allegedly was compromised by analysts’ conflicts of interest.
Merrill is already facing dozens of class-action lawsuits and arbitration claims filed by investors who blame Merrill research for their losses on Internet stocks. Plaintiffs lawyers said Spitzer’s evidence, especially Merrill e-mails in which analysts privately derided stocks they had recommended publicly, gives them ammunition to help them pursue damages that could run into the billions of dollars.
Moreover, Jacob Zamansky, a New York lawyer who already has won $400,000 from Merrill Lynch in one Internet stock-related case, said he believed that apologies to investors and other statements by Merrill Chairman David Komansky and other executives constitute an admission that the company violated industry standards and its own policies regarding research analysts. He said he’ll try to introduce the statements as evidence against Merrill in future proceedings.
“Those statements, together with the e-mails that are really the smoking guns, should help investors in these arbitrations and should also open up class actions,” with judges deciding to grant plaintiffs broad power to look for more incriminating behavior on the part of brokerages.
But some expressed anger that, as Spitzer himself put it, they “will not have in their back pocket an acknowledgement of wrongdoing that is binding in court.”
The Public Investors Arbitration Bar Assn., an association of plaintiffs lawyers in securities cases, urged Spitzer not to settle without an admission of wrongdoing by Merrill.
And Mark E. Maddox, a former Indiana securities commissioner who now represents private parties against securities firms, said the lack of an admission will make it harder for him to represent the dozens of clients who have contacted him.
“I just wish Spitzer would have had the guts to push for an admission in this,” he said.
Spitzer said Tuesday that wringing an outright confession from Merrill would have been a “death warrant” for the firm. Merrill President Stan O’Neal said there was nothing in the settlement that would hamper the firm’s ability to defend itself and that he expected his firm to prevail in the investor litigation.
Merrill investors who believe they were wronged have two ways to try to recover damages: by hiring lawyers to file individual arbitration claims or by joining in federal class-action lawsuits seeking to represent the entire group of investors who lost money. The first tactic has the potential for greater recoveries but generally is available only to investors who lost large sums of money.
Spitzer’s investigators accused Merrill analysts of providing false or misleading assessments on Internet stocks to curry favor with the companies and thus help drum up investment banking work for the firm--and big bonuses for themselves.
The settlement announced Tuesday will allow analysts to continue working alongside investment bankers in some situations but is supposed to eliminate any input from investment bankers in setting analyst compensation, which is to be based solely on how good their recommendations prove to be.
Some attorneys said they believed that was enough for the New York attorney general to have achieved.
“I think it was just too complicated to try to figure out exactly how much money should go to which [investors],” said attorney Steven J. Toll, who has five potential class actions pending in New York federal court against Merrill and its Internet analysts and another against competitor Salomon Smith Barney for similar alleged analyst conflicts of interest.
Each of those cases focuses on analysts’ recommendations on a single company, and each involves losses that run “into the hundreds of millions of dollars,” Toll said. Overall, Merrill’s potential liability “is clearly billions of dollars,” he said.
Investors in the Internet cases will face a series of hurdles thrown up by Merrill Lynch, which contends that many of the derogatory comments about companies were made by junior analysts who didn’t make actual stock recommendations or were made after Merrill downgraded the stocks.
Merrill is expected to question whether investors really relied on its recommendations during the general Internet frenzy of the late 1990s, and to suggest that a host of factors it had no control over contributed to the Internet bubble and its eventual popping.
Spitzer’s office had threatened to bring criminal charges against Merrill Lynch. In the 1994 Orange County bankruptcy case, Merrill initially paid $30 million to settle a criminal investigation, and only much later came up with more than $400 million to settle its civil liability.
