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Giuliani Working for Merrill Lynch

Securities: Former New York mayor is helping to negotiate a settlement with state's attorney general. Legal expert says company's move could backfire.


NEW YORK — Merrill Lynch & Co. on Wednesday said it hired former New York Mayor Rudolph W. Giuliani to help it negotiate with the state attorney general over charges of deception and conflict of interest in Merrill's stock-research operation.

Tapping Giuliani shows how seriously Merrill takes Atty. Gen. Eliot Spitzer's allegations and the damage they could do to the No. 1 brokerage, said former federal prosecutor Christopher J. Bebel of Houston law firm Shepherd, Smith & Bebel.

But the move "could end up backfiring on Merrill in a major way because it draws more attention to the investigation and the underlying misconduct" alleged, Bebel said.

Spitzer stunned Merrill and Wall Street on April 8 when he accused the firm's Internet analysts of recommending stocks in 2000 and 2001 simply to curry favor with the companies. Spitzer said a 10-month investigation turned up Merrill e-mails showing analysts privately disparaging stocks while strongly advising clients to buy them.

Los Angeles Times Saturday April 27, 2002 Home Edition Main News Part A Page 2 A2 Desk 2 inches; 37 words Type of Material: Correction
Merrill Lynch--A story in Thursday's Business section on brokerage Merrill Lynch & Co.'s hiring of former New York Mayor Rudolph W. Giuliani misstated his role on behalf of the firm, which is to assist in negotiations with the office of state Atty. Gen. Eliot Spitzer.

The e-mails reinforced long-standing allegations that brokerage analysts tailor their recommendations to help their investment-banking colleagues win lucrative advisory and stock-underwriting business.

The fallout from the Spitzer probe ultimately could cost Merrill $2 billion in fines, legal settlements and lost business from disgruntled customers, David M. Trone, an analyst at Prudential Securities, estimated in a report Wednesday.

At the same time, Trone said that the market has overreacted to the Spitzer revelations, pounding $4.4 billion of market value out of the stock since April 8. The shares fell $2.49 more on Wednesday, to $44.65 in New York Stock Exchange trading.

Giuliani, a former U.S. attorney in New York who aggressively prosecuted insider trading and other securities cases in the 1980s, opened a private consulting business, Giuliani Partners, after ending his term as mayor Jan. 1. The company was formed as a venture with accounting firm Ernst & Young.

So far, Giuliani and Spitzer have had just one conversation--on April 8, a few hours before Spitzer went public with the results of his probe, said Giuliani spokeswoman Sunny Mindel.

Giuliani has been offering Merrill advice on how to make structural changes to enhance its research unit's independence from its investment-banking operation. He also has been authorized to negotiate directly with Spitzer's office toward a broad settlement, Mindel said.

The two sides are said to be far apart on terms of a settlement, with Spitzer holding out for an acknowledgment of wrongdoing by Merrill, plus fines and restitution of as much as $250 million, according to people familiar with the attorney general's position.

Giuliani emphasized Merrill's corporate citizenship in his conversation with Spitzer, Mindel said. The former mayor noted that Merrill and 8,500 employees returned to its World Financial Center headquarters as soon as possible after the building was rocked by the Sept. 11 terrorist attack on the adjacent World Trade Center.

Last week, acceding to one of Spitzer's demands, Merrill agreed to provide greater disclosure about its business relationships with companies covered by its analysts. The first tangible result of that agreement appeared Wednesday on Merrill's Internet site, where it listed the names of 640 corporate clients.

Spitzer has expanded his investigation of analysts' conduct to include other top Wall Street firms, including Morgan Stanley, CS First Boston and Goldman Sachs.

Spitzer has been pushing--unsuccessfully, so far--for federal legislation to bolster analyst independence within securities firms.

He also has said his office intends to cooperate with the Securities and Exchange Commission, the top federal securities regulator. Spitzer met for about an hour Wednesday in Washington with SEC Chairman Harvey L. Pitt. Neither side offered details of the discussions.

Regulators in California and New Jersey are joining their New York counterparts to head a multi-state task force to look further into issues raised by Spitzer's probe, the North American Securities Administrators Assn. said this week.

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