Merrill Enlists Giuliani to Aid Battle Against Spitzer’s Crusade

New York, April 24: | Updated: Apr 25 2002, 05:30am hrs
With scrutiny on its stock research intensifying, Merrill Lynch & Co. is pulling out the heavy hitters in an effort to blunt the attacks of New York Attorney-General Eliot Spitzer, who has threatened the firm with civil and possible criminal action over alleged conflicts in its research.

The biggest name on the list: Rudy Giuliani. The popular former mayor of New York City, who first made his mark as a Wall Street-bashing prosecutor during the 1980s, has recently switched sides, joining Merrill’s side as a hired outside "adviser" as the nation’s largest brokerage firm negotiates with Mr Spitzer.

Merrill’s lobbying efforts reflect a growing concern over Mr Spitzer’s inquiry, which is gaining momentum. On Tuesday, the North American Securities Administrators Association, which represents state securities regulators, said it created a multi-state task force that also will look into possible securities-law violations involving Wall Street research.

Meanwhile, officials at the US Justice Department say they, too, are interested in examining the situation.

And Mr Spitzer is scheduled to appear with congressional and labor leaders at a news conference calling for an amendment to legislation involving the collapse of Enron Corp. that would require more disclosure by Wall Street analysts and other measures.

Mr Giuliani, in an interview, confirms that he called Mr Spitzer two weeks ago, just hours before the Attorney-General announced the results of his investigation into Merrill, including the release of e-mails -- some of them derogatory in nature -- showing that Merrill analysts often harbored doubts about stocks that received high public ratings from the firm.

"The reality is that Merrill is an enormously important player in New York in the right sense," Mr Giuliani said. "There is a problem here; no one is running away from that. We should try to find a solution that corrects it and that really requires more than one player, not just one Attorney- General taking action. That was the point I was trying to make with Eliot."

The move by Merrill comes as the two sides continue to negotiate a possible settlement of criminal or civil charges filed by Mr Spitzer’s office, following a 10-month probe into the firm’s research. Mr Spitzer has threatened that Merrill, if it refused to agree to major changes in its research process, could face criminal charges that the firm misled investors with overly optimistic research -- something Merrill denies.

The hiring of Mr Giuliani is the most striking part yet of Merrill’s effort to limit the damage from Mr Spitzer’s campaign against Wall Street’s research practices with politicians and others who could influence Mr Spitzer and other regulators now looking into analysts’ conflicts.

As it seeks help in the matter, Merrill also has reached out to New York Democrat Sen Charles Schumer and has hired as outside counsel Mr Spitzer’s old law firm of Skadden Arps Slate Meagher & Flom. Mr Schumer, through a spokesman, said Merrill didn’t ask for anything specific but did contact him on the issue. Mr Schumer didn’t offer to help the firm, the spokesman added.

Mr Spitzer is scheduled to meet Wednesday with top officials of the Securities and Exchange Commission, including chairman Harvey Pitt, to discuss a possible framework for a settlement to restructure the firm’s research organisation that could be applied to other Wall Street firms as well -- something Merrill has sought in a settlement.

SEC officials have been concerned about the prospect of a state regulator imposing changes in rules governing brokerage firms and dealers, which include Wall Street research, outside the context of existing federal rules. A spokeswoman for the SEC had no comment.

It isn’t clear yet how much of an impact all the lobbying will have on Mr Spitzer. People close to the Attorney-General say he isn’t backing down on several key provisions in any deal he strikes with Merrill, namely that the firm pays a fine and makes some restitution to small investors who lost money relying on the firm’s research product, for a combined total of about $100 million. He also wants the firm to admit wrongdoing in the matter.

Merrill has so far proposed separating research from investment banking by creating a separate board to oversee activities.

"Many individuals have contacted the Attorney-General on the matter and he tells everyone the same thing -- that the interests of investors come first," a spokesman for the Attorney-General’s office said Tuesday.

Mr Giuliani, meanwhile, says he has been quietly working mostly behind the scenes with Merrill to develop a plan for "structural reform" regarding the firm’s research.

Mr Giuliani and Merrill have a longstanding relationship that dates back to when he was US attorney for the Southern District of New York, prosecuting securities-law violations on Wall Street. Since leaving office as mayor, Mr Giuliani has formed Giuliani Partners, his own consulting firm.

Mr Giuliani says that before he spoke with Mr Spitzer two weeks ago, he also provided Merrill with a legal analysis of the situation.

Mr Giuliani concedes that in his conversation with Mr Spitzer, both men spoke about "the merits" of Mr Spitzer’s case against the firm, but he wouldn’t elaborate.

"There were points I made that he agreed with, but we did get into the merits, and he did not agree with that."

But the main part of his pitch to Mr Spitzer was that Merrill is a good firm and a good corporate citizen, which, unlike other firms, returned to its headquarters at the World Financial Center in lower Manhattan after the Sept 11 terrorist attacks, just yards from ground zero.

"I told him this is a more complex problem, and the way it’s being addressed, it needs more time and reflection," Mr Giuliani said. "It should also be part of a larger response by the SEC and regulatory agencies." Mr Spitzer’s response, according to Mr Giuliani: "I’ll consider it."

A few hours later, Mr Spitzer blasted Merrill with the findings of his inquiry.