Securities and Exchange Commission
Litigation Release No. 18115 / April 28, 2003
Securities and Exchange Commission v. Merrill Lynch, Pierce, Fenner & Smith Incorporated, 03 CV 2941 (WHP) (S.D.N.Y.)
Securities and Exchange Commission v. Henry M. Blodget, 03 CV 2947 (WHP) (S.D.N.Y.)
SEC SUES MERRILL LYNCH AND HENRY M. BLODGET FOR RESEARCH ANALYST CONFLICTS OF INTEREST FIRM AND BLODGET TO SETTLE WITH SEC, NASD, AND NYSE
The Securities and Exchange Commission announced today that it has settled charges against Merrill Lynch, Pierce, Fenner & Smith Incorporated, a New York-based brokerage firm and investment bank, and former Merrill Lynch research analyst Henry M. Blodget arising from an investigation of research analyst conflicts of interest. Merrill Lynch and Blodget have agreed to settle enforcement actions and proceedings brought by the Commission, NASD, Inc., and the New York Stock Exchange, Inc. ("NYSE"). These settlements are announced along with global settlements reached between nine other brokerage firms and the Commission, NASD, NYSE, the New York Attorney General, and other state regulators.
As part of its settlement, Merrill Lynch has agreed to pay $100 million in penalties, to be deemed satisfied by Merrill Lynch's $100 million payment to state securities regulators last year arising from similar conduct. Merrill Lynch also will pay, over five years, $75 million to provide the firm's clients with independent research, and $25 million to be used for investor education. In the SEC action, Merrill Lynch has agreed to a federal court order that will enjoin the firm from future violations of the federal securities laws and NASD and NYSE rules, and require the firm to make changes in the operations of its equity research and investment banking departments.
In his settlement, Blodget has agreed to pay $2 million in penalties and an additional $2 million disgorgement, all of which will be placed into a distribution fund for the benefit of customers of Merrill Lynch. In the SEC action, Blodget also has agreed to a federal court order that will enjoin him from future violations of the federal securities laws and NASD and NYSE rules. Blodget also has agreed to be barred from associating with any broker, dealer, or investment adviser.
In connection with these matters, the Commission today filed separate complaints against Merrill Lynch and Blodget in the U.S. District Court for the Southern District of New York, alleging direct and aiding-and-abetting violations of the federal securities laws and NASD and NYSE rules. According to the Commission's Complaint against Merrill Lynch, from at least July 1999 through June 2001, research analysts at Merrill Lynch were subject to inappropriate influence by investment banking at the firm. The Complaint also alleges that Merrill Lynch published false or misleading research, published exaggerated or unwarranted research or research that lacked a reasonable basis, and failed to maintain appropriate supervision over its research and investment banking operations.
The Commission's Complaint against Blodget alleges that he aided and abetted Merrill's publication of false or misleading research on one company, and issued research reports on other companies that were exaggerated, unwarranted, or lacked a reasonable basis.
Specifically, the Commission's Complaints allege that:
Merrill Lynch has agreed to settle the Commission's action and has consented, without admitting or denying the allegations of the Complaint, to the entry of a final judgment that, if approved by the court, permanently enjoins Merrill Lynch from violations of antifraud provision Section 15(c) of the Securities Exchange Act of 1934 and Rule 15c1-2 thereunder, and NASD and NYSE rules pertaining to just and equitable principles of trade (NASD Rule 2110; NYSE Rules 401 and 476), advertising (NASD Rule 2210; NYSE Rule 472), and supervisory procedures (NASD Rule 3010; NYSE Rule 342). The final judgment also orders the firm to make the payments described above.
In addition, the final judgment orders Merrill Lynch to implement structural reforms and provide enhanced disclosure to investors, including a broad range of changes relating to the operations of its equity research and investment banking operations. Merrill Lynch has agreed to sever the links between research and investment banking, such that: research and investment banking are physically separated with completely separate reporting lines; analysts' compensation cannot be based directly or indirectly upon investment banking revenues; investment bankers may no longer evaluate analysts; investment bankers will have no role in determining what companies are covered by the analysts; and research analysts will be prohibited from participating in efforts to solicit investment banking business, including pitches and roadshows. In addition, Merrill Lynch must disclose on the first page of each research report whether the firm does or seeks to do investment banking business with that issuer, and when Merrill Lynch decides to terminate coverage of an issuer, Merrill Lynch must issue a final research report discussing the reasons for the termination. Each quarter, Merrill Lynch also will publish on its website a chart showing its analysts' performance, including each analyst's name, ratings, price targets, and earnings per share forecasts for each covered company, as well as an explanation of the firm's rating system.
Merrill Lynch also has agreed as part of this settlement to retain, at its own expense, an Independent Monitor to conduct a review to provide reasonable assurance that the firm is complying with the structural reforms. This review will be conducted eighteen months after the date of the entry of the Final Judgment and the Independent Monitor will submit a written report of his or her findings to the SEC, NASD, and NYSE within six months after the review begins. Five years after the entry of the final judgment, Merrill Lynch must certify to the SEC and other regulators that it has complied in all material respects with the requirements and prohibitions of the structural reforms.
Blodget has agreed to settle the Commission's action and has consented, without admitting or denying the allegations of the Complaint, to the entry of a final judgment that, if court approved, permanently enjoins him from aiding and abetting violations of Section 15(c) of the Exchange Act and Rule 15c1-2 thereunder and from violating NASD and NYSE rules governing just and equitable principles of trade and advertising. Blodget also has agreed to settle administrative proceedings that will be instituted by the Commission based upon the entry of the final judgment by consenting to the issuance of a Commission order that permanently bars him from associating with any broker, dealer, or investment adviser.
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The Commission acknowledges the assistance of NASD, the New York Stock Exchange, the New York Attorney General, and other state regulators in the investigation of this matter.
SEC Complaint in this matter (Merrill Lynch)