On April 26, David Komansky,
chief executive of Merrill Lynch, one of the "big players" in world
financial markets, apologised for a possible instance of breach of trust
in the work of Merrill's stock research division.
have failed to live up to the high standards that are our tradition, and I
want to take this opportunity to publicly apologise to our clients, our
shareholders and our employees," Mr Komansky said at the annual meeting of
America's largest broker.
Komansky's apology came in the wake of incessant pressure from Eliot
Spitzer, the feisty New York attorney-general, who had launched
investigations into possible wilful promotion by Merrill's stock analysts
of shares they privately considered to be duds, in order to help the
company earn large fees from its investment banking operations. Mr.
Spitzer's investigations began as far back as July last year, when Merrill
chose to settle a suit filed against it by an investor in the internet
venture InfoSpace, whose share price collapsed from $132 in March 2000 to
$1.46 this April. The complainant, whose case was argued by securities
lawyer Jacob Zamansky, held that he had suffered major losses in
investments in InfoSpace made on the basis of advice offered by Merril's
investment analysts. In particular, Henry Blodget, Merrill Lynch's star
internet stock analyst, who left the company last year, had backed the
stock and recommended it as a wise investment, even when the share was in
Taking the cue from Merrill's desire to settle, the attorney general chose
to launch an investigation into conflicts of interest between stock
analysts and investment bankers in Wall Street firms. He not only
subpoenaed the evidence for the Merrill case from Jacob Zamansky, but more
than 30,000 intra-office emails, that reveal the potential conflict of
interest. While these messages include references to InfoSpace shares as
being a “piece of junk”, and others as a “piece of shit”, the research
division of the company was promoting those very shares and its investment
banking division making large sales of them.
The evidence, which Merrill still claims was being taken out of context,
was damaging because, Merrill, as investment banker, earned large
commissions from the sale of shares to gullible investors who bought the
advice and invested in them. In the long run, investors lost out, because
the share prices collapsed, the companies lost out, as they could not back
the hype surrounding their shares with performance that spelt profits, but
Merrill itself appears to have gained huge amounts by way of investment
banking fees. The charge that this was not accidental but wilful carries
all the more weight because the analysts whose “advice” generated the
investment banking business in shares they themselves privately described
as “junk”, were partly paid on the basis of the volume of such business
It is now clear that neither was InfoSpace an exception for Merrill, nor
was Merrill an exception on Wall Street. Salomon Brothers, now the Salomon
Smith Barney unit of Citigroup, had a close relationship with the one-time
telecom darling WorldCom, whose colourful chief Bernie Ebbers had to quit
in ignominy because he drove the company into debt and oversaw a boom and
then collapse in the price of the company's shares. Jack Grubman, a
well-known Salomon Smith Barney research analyst, is now accused of
helping the shares along on their upward spiral during the 1990s, by
hyping up the share. It was only in March 2002 that Grubman changed his
advice on WorldCom, when he was left with little option. He had, in fact,
maintained his “buy” rating as WorldCom shares collapsed from $60 to less
than $6 a piece. Grubman was possibly hoping that his rating would help
reverse the decline and cut client losses.
Jacob Zamansky, the securities attorney who focuses on such cases has
reportedly argued that “Grubman is at the centre of the WorldCom debacle.
His research reports and hyping of the stock led to artificially high
levels.” Not surprisingly, Grubman has been the target of a number of
lawsuits filed among others by current and former WorldCom employees, who
claim that they were given wrong advice by him or that his bullish reports
resulted in their clients losing money.
Zamansky has also filed an arbitration case against Salomon Smith Barney
and Jack Grubman, claiming that one of his clients lost $455,000 after
buying shares in Global Crossing, the bankrupt telecoms group, recommended
by Grubman. Global Crossing, as is to be expected, was also a lucrative
Salomon banking client. "Jack Grubman was the king of conflicted
analysts," Mr Zamansky says. "He unabashedly promoted investment banking
deals for his firm while claiming to be the leading analyst."
Thus, the matter is not just that of wrong judgement or misplaced
enthusiasm of a single analyst. According to the Financial Times, data
compiled by Thomson Financial shows that Salomon, which helped manage
WorldCom debt issues, generated $106m in fees between 1997 and 2001.
Disclosed fees paid by WorldCom to Salomon for merger and acquisition work
amounted to another $61m.