An NASD arbitration panel ordered Merrill Lynch to pay more than $1 million to investors Gary and Lisa Friedman last month for hiding conflicts of interest and issuing fraudulent research.
According to the award, the panel found Merrill “guilty of intentional misconduct” in that the firm knew that many of the companies it was issuing high ratings on were overvalued. Merrill managers “knowingly condoned, ratified and consented to the conduct of its employees,” said the panel. The Boca Raton, Fla., couple originally sought $4 million from the firm, but the panel ordered Merrill to pay roughly $730,000 in compensatory damages and another $300,000 in punitive damages.
“Nobody's been winning these research analyst cases,” says Robert Pearce, the attorney representing the Friedmans. He says his focus throughout the trial was on the blatant conflicts of interest that existed between analysts and investment bankers.
According to Pearce, for most of the time between April 1999 and June 2002, the period cited in the arbitration, Merrill analysts didn't have a single sell or reduce recommendation on more than 1,350 stocks it covered. But when Spitzer's investigation became public, he says, negative ratings were issued for more than 3.5 percent of covered stocks.
The Friedman portfolio contained 40 stocks of which the couple bought or sold shares in based on Merrill's analyst recommendations, says Pearce. Interestingly, none of the Friedman's stocks were involved in the $1.5 billion research settlement that Merrill and 12 other firms made in 2003 and 2004, says Pearce. He says this shows that the research fraud wasn't limited to the Internet sector. “It was clear that Merrill Lynch used all of its analysts, securities reports and ratings as marketing vehicles to boost its investment banking business,” he says.
For its part in the global research settlement, Merrill paid $100 million and agreed to sever links between analyst compensation and investment banking, and to disclose what covered companies had investment banking relationships with the firm.
Lawrence Klayman, another Boca Raton-based securities attorney, says there are lots of research analyst cases out there but most represent angry investors who lost money in the market. He says Pearce succeeded in persuading the panel that Merrill failed in its fiduciary duties, and that the ruling was probably aided by the firm's involvement in the Spitzer settlement as well.