A rare public apology from the chairman of Merrill Lynch & Company has not managed to defuse the anger of investors large and small over the conflicts of interest that they contend colored the advice of Merrill’s stock analysts. David H. Komansky, Merrill’s chairman and chief executive, apologized at the firm’s annual meeting on Friday and said he hoped that the firm could quickly reach a settlement with Eliot L. Spitzer, New York’s attorney general. Mr. Spitzer has called Merrill’s research “tainted” by the firm’s desire for investment banking fees, and he is demanding that Merrill pay a large sum to compensate investors. Judging by interviews with several current and former Merrill customers, shareholders and securities lawyers, Merrill has a long way to go to reach Mr. Komansky’s stated goal of restoring investor confidence.
“It’s nice that there’s an apology,” said Philip M. Aidikoff, a lawyer in Beverly Hills, Calif., who has sued Merrill on behalf of investors. “But if research has been compromised by the 800-pound gorilla of investment banking, how are investment banking and research supposed to coexist in the future? It was the tail wagging the dog. It will always be the tail wagging the dog as long as the present structure isn’t changed.”
Mr. Aidikoff expects to gain more clients now that Mr. Spitzer has released e-mail messages that appear to show that Merrill analysts harbored serious doubts about the prospects of companies they were recommending to investors. But not all Merrill customers want to sue the firm; some just want to recoup part of their lost investments.
Mr. Komansky’s apology “is hollow words without being backed up by a financial settlement,” said one longtime Merrill customer in New York who followed the firm’s advice to buy InfoSpace and a few other stocks that crashed. He criticized Merrill’s analysts for failing to warn investors when trouble was brewing at companies for fear of harming investment-banking relationships.
“The downgrades never came,” he said, “and if they came, they came too late. They’ve caused irreparable financial damage to their long-term, valued customers. I would like to see a formula of restitution because these were financial transactions where we were misled.”
Other investors said monetary penalties would not suffice.
“The remedy ought to be that these people cannot participate in the financial world for five years or so,” said Donald Steiner, 66, a retiree in Honolulu who closed his account at Merrill a few years ago. “Give them penalties that they can feel.”
Mr. Steiner, a retired utility executive, said that any analysts found to have been compromised by investment banking concerns should be in line for fines and suspensions. And so should their bosses, he added, including senior executives. “My take on the whole thing is: Who’s in charge?” he said. “It seems they’ve knowingly – not only Merrill Lynch but other brokerage firms as well – played this so-called game, and it’s the small investors that suffer the consequences and get hurt.”
Mr. Komansky said in an interview on Monday on CNBC that the ultimate responsibility rested with him for “anything that happened on my watch.” But he did not suggest how he would be affected by any actions the firm might take. Even some people who had been impressed by the changes Merrill made to its research department last year are having second thoughts.
Officials of the A.F.L.-C.I.O., the umbrella organization of labor unions, said they would probably renew some of their demands for changes in the research departments of Merrill Lynch and some other Wall Street firms.
A federation executive welcomed Mr. Komansky’s apology at Merrill’s annual meeting on Friday, but one of his colleagues said this week that those words illuminated the difference between policies and practices. That colleague, Damon Silvers, associate general counsel of the labor federation, said the changes that Merrill and other firms had agreed to make did not go far enough to prevent the sort of behavior that Mr. Spitzer contends occurred at Merrill.
The federation had pressed to have shareholders of three major securities firms – Merrill, the Goldman Sachs Group and J. P. Morgan Chase – vote this year on proposals to insulate their analysts from their investment bankers. But each of the firms persuaded the labor group that it would adopt new policies to address the concerns.
Merrill announced several changes in its research policies in November, and those changes received an endorsement from the A.F.L.-C.I.O. But Merrill balked at making some other changes, especially those that would have prohibited analysts from helping companies sell stock offerings to institutional investors, Mr. Silvers said.
“They weren’t perfect,” Mr. Silvers said, “but we thought they were making progress.” But now, he said, it is obvious that more needs to be done. “We will probably be going back to all of them,” he added, “in light of the changed landscape.”