According to the Wall Street Journal, Massachusetts regulators accused Merrill Lynch of co-opting "supposedly independent" research analysts to help them dump collapsing auction-rate securities on unsuspecting customers. Let's see. First they "co-opted" their own research department to get them to promote securities of issuers who they were looking to get investment banking business. Then the regulators push for independent research. Now Merrill is accused of "co-opting" the independent analysts to enable Merrill to dump its inventory of auction rate securities?
The continuing problem with Merrill did not escape the notice of investigators -
"We've seen a corruption of research," says Massachusetts Secretary of the Commonwealth William Galvin, who oversees the state securities division. "This is an issue that many of us on the enforcement side have seen years ago, and it's the same pattern."
Obviously we don't know if this is true, and on more than one occasion we have seen securities regulators misunderstand the markets, or twist a fact far enough to reverse it, but these are serious allegations, and it may not be limited to Merrill and UBS. The Journal says that this complaint, coming on the heels of the complaint against UBS, is part of a widening crackdown on "Wall Street peddlers" of the "arcane" auction products -- debt instruments that some brokers likened to stable money-market funds and other cash-like investments.
Auction rate securities are hardly an "arcane" investment, but the conduct of these firms, if true, demonstrates a dark side of big firm Wall Street that needs to be addressed. The utter contempt for the markets, for their own brokers, and most egregious, their own customers is appalling.
How did the AG's office gather enough evidence to charge Merrill? Well, you get one guess. In this day and age, what is the stupidest, dumbest, most "arcane" method of communication when you are going to do something that is illegal, immoral or unethical? Why you discuss it in email!
According to the Journal, Merrill Lynch executives, the same group of people who were severely burned when their research analyst scandal was laid bare in their own emails, discussed the ARS markets and their participation in it, in emails.
The WSJ article contains a number of very disturbing allegations regarding Merrill's conduct in influencing the analysts comments, but the most telling, for me at least, this is series of allegations:
Emails show increasing desperation by the sales force. On Nov. 26, Ms. Constable [a managing director in charge of Merrill's auction-rate securities desk] told an associate in an email that Merrill had to slash prices to sell its inventory of auction-rate securities: "The gloves are off and we are not concerned about issuer perception of [Merrill Lynch's] abilities and the competition. Gotta Move these microwave ovens!!"
Still, on Feb. 7, 2008, Mr. Conery [a research analyst]tried to reassure nervous brokers on another conference call, saying "I will tell you Merrill Lynch, certainly, by all indications, is committed to this product" and that the securities represent "a good, conservative, reasonable investment."
Six days later, the auction-rate securities market collapsed. Merrill declined to make any of the employees cited in the emails available for comment and none could be reached directly.
If true, Merrill is trying to dump its inventory, on its own customers, for fear of financial losses, and looking to transfer those losses TO ITS OWN CUSTOMERS. On February 7, 2008, it is telling its sales force that the securities are "a good conservative investment" and the market collapses the following week, undoubtedly because Merrill withdrew its support for the auctions.
It is the same allegation at UBS. Screw the brokers, screw the customers, we need to make money, and we are going to dump this crap on our customers.
"You and Us?" With friends like that............
And what is the state going to do about it? Basically nothing. The state is looking for fines, restitution and a censure.
How about putting Merrill out of business for its flagrant and ongoing abuse of the markets, and its customers. How about barring the executives who have engaged in this conduct - for life?
A fine? Merrill paid a BILLION DOLLAR fine and it doesn't phase them, they simply continue onward, acting in their own financial interest, with complete and utter disregard of the interests of their clients.
A fine will not do it. Suspend Merrill for 6 months. Bar the employees involved, and suspend the executives with the supervisory responsibility for this conduct.
That is what the regulators would do to any of the 5,000 small broker dealers in this country, why are we continuing to allow this flagrant abuse to continue?
