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Thursday, 11 April, 2002, 20:47 GMT 21:47 UK
Official grants Merrill Lynch more time
Merrill Lynch
New York state attorney general Eliot Spitzer has granted Merrill Lynch a reprieve from the court order requiring the firm to change the way it conducts analyst research and makes stock recommendations.

On Thursday, a Merrill Lynch spokesman told BBC News the attorney general's office had extended the deadline by a week, in order to give the investment-banking firm more time to implement changes.

New York Attorney General Eliot Spitzer
Mr Spitzer has given Merrill Lynch more time
Mr Spitzer's investigation into Merrill Lynch follows high-profile federal investigations into accounting scandals at Enron and Arthur Andersen.

On Monday, the attorney general shocked New York's financial community, following a 10-month investigation into Merrill Lynch practices, by requiring the firm to disclose more fully the conflicts that exist between its research and investment banking sides.

Breeching the wall

Mr Spitzer contends Merrill Lynch disseminated misleading information when its analysts simultaneously issued buy recommendations on certain stocks to small investors while warning its investment-banking clients to steer clear of them.

Thought to be chief among those analysts that issued such recommendations is former Merrill Lynch analyst Henry Blodget.

Mr Blodget, along with Morgan Stanley Dean Witter analyst Mary Meeker, has been a target for criticism for promoting stocks in 2000 even as the stocks were plummeting in value.

Investment bankers such as Merrill Lynch have long been criticised for failing to separate their research and banking departments.

The bankers contend there is no money in research alone and that stock and bond deals, in which they derive fees and other compensation, subsidises the research.

Nevertheless, Wall Street firms also say their research and banking departments are autonomous units and avoid conflicts of interest that might arise from recommending stocks in which the bank might profit from the sale of shares.

Immediate reforms

But the attorney general's allegation is that the wall was breeched, and that Merrill Lynch falsely advised clients about the merits of individual stocks in violation of state and federal law.

"I'm absolutely convinced that Merrill Lynch's rating system was tainted by conflict of interest," Mr Spitzer told BBC News.

To illustrate this point, Mr Spitzer released the contents of an e-mail from a senior manager that read "the whole idea that we are independent of [the] banking [division] is a big lie".

In issuing his court order on Monday, the attorney general required Merrill Lynch to make "immediate reforms" to resolve those conflicts of interest.

For its part, Merrill Lynch has said its e-mails had been taken out of context by the attorney general and is working with the attorney general's office to reach a settlement.

Looking elsewhere

Also noted during Monday's press conference was Mr Spitzer's declaration that his office "has issued subpoenas to other firms".

While he would not specifically name the other firms to be subpoenaed nor provide the number of firms, reports suggest they include several of Wall Street's biggest investment banks.

Mr Spitzer said he wanted to ensure that the problem his 10-month investigation uncovered at Merrill Lynch does not exist elsewhere.

"We are going to check to make sure that at the other investment banks the obligations to the banks did not taint or change the ratings that they had created for the investors," Mr Spitzer said.

Mr Spitzer characterised the written demands for evidence as a mechanism for government agencies to gather information.

He said what he uncovered at Merrill Lynch is reason to begin looking elsewhere.

New York state attorney general Eliot Spitzer
"We are expanding the universe of investment banks"
The BBC's Hugh Fraser
"One of Merrill's internal e-mails compares the role of analysts to prostitution."
See also:

24 Jan 02 | Business
Merrill Lynch moves into loss
09 Jan 02 | Business
Merrill Lynch cuts 9,000 jobs
23 Oct 01 | Business
Merrill offers redundancy plan
16 Jul 01 | Business
Three Wall Street giants downgraded
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