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Merrill Lynch Boldly Goes Beyond Arthur Andersen
Published on Saturday, June 1, 2002 in the Boulder Daily Camera
Merrill Lynch Boldly Goes Beyond Arthur Andersen
by Christopher Brauchli

But good God! What an age is this, and what a world is this! That a man cannot live without playing the knave and dissimulation.

  • Samuel Pepys, Diary, March 22, 1660

    Some would not have attempted to outdo Arthur Andersen. Merrill Lynch accepted the challenge and succeeded. It used the English language to even greater disadvantage than Arthur Andersen had done just a few months earlier.

    It was January 2002 and Arthur Andersen realized something had to be done to salvage its reputation. January was, of course, a bit late to do anything of a substantive nature since the company's problems found their genesis in activities that had occurred months and, in some cases, years earlier. In hopes of stemming the effect of endless bad news, its then-chief executive, Joseph F. Berardino, took out full page newspaper ads in a few national newspapers.

    In those ads he referred to the company's conduct as being the result of "an error in judgment. . . made by Andersen personnel. . . .", an odd way of describing conduct that would soon be the subject of a criminal prosecution. He described administrative changes being undertaken to make it clear that the company "will do what is right, " once again oblivious to the fact that it was a bit late to be doing what was right after having done what was wrong for so many months. Joe, as he signed the letter, thought this letter would restore a reputation that was soon to be further sullied by the filing of criminal charges and a highly publicized criminal trial relating to the subject matter discussed in his letter. He was wrong. Its reputation continued to slide and clients fled to other firms.

    Who would have thought that a scant four months later Merrill Lynch would come out with a bit of writing that made Joe sound like a thoughtful scrivener. It, too, was trying to salvage its reputation. Here's why.

    One of the things Merrill Lynch has historically done, is recommend to customers what stocks they should sell and buy in order to make money. When its customers follow its advice, the people giving the advice earn commissions on the sales. If the advice is good, the people taking it also make money. Earning commissions, however, is not as lucrative as what the company earns when working with investment banks. Investment-banking fees are generated when Merrill Lynch helps companies issue stock or debt or advises them on mergers and acquisitions. Those fees are where the big bucks are.

    We have now learned that many of the people who were making recommendations as to what stocks the ordinary investor should buy, were also being compensated for bringing in new banking clients. It turned out that many analysts at Merrill Lynch were privately deriding the very stocks they were touting, the touting being designed to curry favor with the investment banking community. Internal e-mails disclosed that analysts were describing some of the stocks they were recommending to clients as "junk," "crap," "dog" and "disaster." (Referring to one of the words my spell check says "Avoid this offensive term. Consider revising." Merrill Lynch didn't have spell check.)

    The practices came to light when Attorney General Eliot Spitzer of New York commenced an investigation under the General Business Law of the State of New York which might ultimately have resulted in criminal and civil charges against the company. The investigation ended after Merrill Lynch agreed to pay a $100 million fine. As part of the settlement, the company issued a statement that was Exhibit B to the Stipulation and Order of Discontinuance that brought an end to the investigation. Exhibit B is the written statement that makes Joe Berardino look good.

    Exhibit B begins by using words that normally are used by people who are pleased to be in a position to make a public statement. It says that: "Merrill Lynch would like to take this opportunity, as part of our Agreement reached with New York State Attorney General . . . . [and others] to publicly apologize to our clients, shareholders and employees for the inappropriate communications brought to light by the . . . investigation." What wordsmith would couple payment of $100 million to settle a lawsuit with a statement that this was an "opportunity"? What inkslinger would describe the conscious deception of millions of clients by its written recommendations as "inappropriate communications?" Who would follow those inanities with a statement that the company "sincerely regret[s] that there were instances in which certain of our Internet sector research analysts expressed views which at certain points may have appeared inconsistent with Merrill Lynch's published recommendations?" Who thinks that describing a stock as "junk" on the inside and urging investors on the outside to buy it is being simply "inconsistent"? Answer: someone the Italians might describe as a few strawberries short of a picnic.

    The statement goes on to say that "some" of the offending communications "violated internal policies, failed to meet the high standards that are our tradition and will not be tolerated." It does not say which of the offending statements comported with the company's high standards.

    In addressing the annual stockholders' meeting, the company's chief executive, David Komansky, showed that he was Joe Berardino's equal. He told stockholders, among other things, that he regretted "that the perception of our research integrity has clearly been affected." That phrase would have come closer to the truth had he left out the word "perception."

    It's a sad day for industry when its captains' awkward attempts at explaining their companies even more awkward actions fail totally because of the captains' inability to write and think. It's no wonder they're in trouble. So, thanks to them, are a lot of other people.

    Christopher R. Brauchli is a Boulder, Colorado lawyer and writes a weekly column for the Knight Ridder news service.

    Copyright 2002 The Daily Camera


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