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Protect investors from brokers' stock scams: when analysts issue bogus stock recommendations, attorneys can hold them liable for clients' lost savings.

Article Excerpt
On May 21, 2002, Merrill Lynch, one of the world's largest brokerage firms, agreed to settle a case brought by New York Attorney General Eliot Spitzer alleging that the company defrauded retail brokerage customers.

According to Spitzer, Merrill Lynch issued misleading "buy" recommendations on over two dozen stocks that were followed by its Internet analyst group. (1) The company's goal was to curry favor with the stocks' issuers, in hopes of securing lucrative investment-banking business in the future. (2)

Secretly, however, Merrill Lynch analysts disparaged those stocks in internal e-mails, describing the same stocks they recommended to their customers as "dogs" and "pieces of crap," among other less-than-flattering references. (3) Internally, it was a poorly kept secret that analyst recommendations were little more than a tool to gain investment-banking business and that they bore no relation to the truth about the stocks. (4) In fact, the company makes more money through stock-and-bond underwriting and merger deals than it does selling stocks to its retail customers. (5) Merrill Lynch and other brokerage firms purportedly pay their analysts substantial year-end bonuses based on their success in securing that more lucrative business. (6)

Retail investors have no way of knowing about this inherent conflict of interest. Merrill Lynch mounts slick advertising campaigns touting its "tradition of trust." It makes the following promises, among others, to investors:

* "At Merrill Lynch, the interests of our clients always come first."

* "Your relationship with Merrill Lynch is serviced by professionals committed to the highest standards of integrity."

* "The cornerstone of the Merrill Lynch client relationship is accountability and open communication." (7)

While the "highest standards of integrity" in the securities industry have always fallen well short of any objective measure of the term, investors are only now waking up to how low those "high standards" really are. Unfortunately, the only real value of the New York attorney general's settlement with Merrill Lynch is that it alerts the investing public to how deep the chasm is between reality and the perception of integrity generated by Wall Street advertising campaigns.

The $100 million Merrill Lynch paid to settle the New York case represents only a fraction of its $2.4 billion operating profit--and not a single penny will go to investors who believed the company's recommendations and lost their savings...

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