Keep Those Microwave Ovens Moving…


New York – Merrill Lynch has been charged with fraud by the Massachusetts Securities Division. The research department deserves a comment, but sales and marketing deserve two.

Conflict of interests reflected in research -again

Next in the line of sell side firms facing charges due to conflict of interests in their research is Merrill Lynch – yes, again. Yesterday, the Massachusetts Securities Division (MSD) charged this Wall Street giant with fraud, as well as dishonest and unethical conduct in dealings involving Action Rate Securities (ARS).

According to the MSD’s fraud complaint, and the 53 exhibits supporting it, Merrill violated several regulations since it created, and successfully implemented, a sales and marketing structure which misled investors and shook the stability of the entire auction market. According to the complaint such sales/marketing structure, and its interaction with the research department, rendered thousands of investors with illiquid investments.

Not surprisingly, Merrill has been in the headlines over the past 24 hours. Leading newspapers are slush with quotes such as the following, which appears in the complaint’s summary: “Particularly egregious, was the manner in which Merrill Lynch co-opted its supposedly independent Research Department to assist in sales efforts geared towards reducing its inventory of ARS.”  

Furthermore, the complaint, and of course the media, released a number of e-mail communications from sales and trading personnel showing attitudes and comments not aligned with their recommendations to investors. Almost seven years after Spitzer’s hit on Wall Street using their own e-mail messages as proof against them, it is shocking to still see executives being incriminated through their e-mails. In this particular case, microwave ovens needing to me moved (i.e. securities), and $2K dinners in fancy restaurants are part of the repertoire of communications that bring to light the managers’ real motivations.

Merrill has issued a statement in response to the MSD complaint. The firm assures that it sold ARS, not in an attempt to quickly get rid of underperforming securities, but because they thought they were a good investment opportunity for their clients.

Reddite ergo quae sunt Caesaris, Caesari  (Then give Caesar what is Caesar’s)

Despite the many similarities with the Spitzer’s era, this case has one particularity: analysts in the research department dutifully reported the risks with ARS. The MSD’s complaint establishes that “when Sales and Trading, including Auction Desk personnel, did not agree with the tone or context of a published research piece, Merrill Lynch managers permitted Sales and Trading to insist the published report to be retracted and replaced with a more sales friendly piece.”

The complaint includes evidence to the fact that the analysts refused to alter their report upon initial request from the Manager Director in charge of the auction desk. However, eventually the Research Department agreed to re-write the piece giving glowing recommendations for ARS.

The 2002 Global Research Settlement banned investment bankers, not sales personnel, from influencing analysts. Common sense, ethical principles, and the law indicate that analysts and research professionals should not yield to any external pressures. Neither their reports should give in to conflict of interests. However, giving Caesar what is Caesar’s, Merrill’s analysts initial report was accurate in denouncing the dangers of ARS. Management, sales, and trade personnel shoulder a big responsibility here. Defending themselves from these people’s pressures is not part of an analyst’s job description.

The enforcement section of the complaint seeks to repair the damage caused to investors and to punish the violator. Hopefully this will restore investors’ confidence in financial services research.



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  1. Actually, it is part of an analyst’s job description to not sign off on misleading research, even under pressure from sales or management. If they can’t put up with external “pressures”, they are in the wrong job. Anyone who is an analyst at Merrill is intelligent and experienced enough to know better. It is not sufficient to simply claim that they were bullied into it – publishing analysts should be able to stand behind any research with their name on it.

  2. Bill George on

    Ronit’s comment reflects the ideal.

    But, I believe within the “full-service brokerage culture” the ideal is sometime perverted by the day-to-day objective of installing microwave ovens. . . moving those refrigerators and moving those color T.V.’s (to extend Ms. Blanco’s metaphor, just a bit).*

    Within the full-service investment banking and brokerage “culture” it seems the worker receiving the accolades from his or her peers, receiving the positive “strokes”, the serious bonus money and other forms of recognition from his or her superiors are those workers that “go with the program”.

    And it seems even when excesses become so blatant the excesses are discovered, punishment is only meted to the lowest and most expendable perpetrator in the cultural chain. Securities regulations talk about the responsibility to supervise – one must question, where were Charlie Grubman’s and Henry Blodgett’s supervisors during the last big set of investigations?

    They were probably playing a pick-up basketball game at The 92nd Street Y.

    You don’t kill a weed by pruning a leaf . . . you dig-out the roots.

    * “Money For Nothing (Chicks For Free)” by Dire Straits as performed by Mark Knopfler, Eric Clapton, “Sting”, Phil Collins, etc.

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