The subprime debt market blowup has had very different effects on Wall Street firms Goldman Sachs and Merrill Lynch. Goldman earnings shined in the third quarter, and Merrill earnings stunk. But according to news reports, both firms could be getting a visit from the SEC to make sure everyone played by the rules.
According to this story from the Times Online, the SEC is investigating whether Merrill Lynch made adequate disclosures to investors about its exposure to risky debt. At the same time, this story from a New York Post columnist says the SEC is looking into whether Goldman’s glorious earnings, boosted in large part by a widely-reported on subprime hedging strategy, may in fact have been aided by insider trading-related activity. Spokesmen for both Merrill and Goldman say they don’t comment on regulatory matters, but a person at Goldman familiar with the Post story called it “absolute nonsense” and said that many firms have similar hedging strategies in place. The SEC could not be reached for comment.
Merrill is also the target of a growing number of lawsuits seeking class action status and representing investors who, the suits claim, were duped by allegedly false and misleading statements made by Merrill regarding its exposure to risky debt. The first such suit was brought by Coughlin Stoia Geller Rudman & Robbins on Tuesday. It seeks to recover damages for those who purchased Merrill stock between Feb. 26 and Oct. 23. A Merrill spokesman said the suit “has no merit” and that “we reported our financial data accurately.”But since Tuesday two more lawsuits seeking class action status have been filed against Merrill and certain officers and directors. Both suits, one brought by Abraham Fruchter & Twersky, the other by the Law Offices of Brian M. Felgoise, make allegations that are similar to those in the first lawsuit—that shareholders who acquired Merrill stock between February 26, 2007 and October 23, 2007 were duped because Merrill didn’t adequately reveal its risk exposure. All three suits are pending in the United States District Court for the Southern District of New York. The Merrill spokesman was not aware of these other two lawsuits.