Merrill says working with NY officials on research reports

By Ronda Fears

Nashville, Tenn., April 17 - Investment banking giant Merrill Lynch & Co. Inc. on Wednesday said it is working with the New York State Attorney General to resolve charges of biased research, and that whatever conclusions are made should be applied industrywide. Also Wednesday, the company reported a 26% drop in first quarter earnings and 21% drop in revenues from year-ago levels.

New York Attorney General Eliot Spitzer has accused Merrill of producing research to attract investment banking deals. The attorney general's office procured a court order that would have forced the firm to disclose its banking relationships on all research reports, but a stay has been granted to Merrill Lynch until Friday to argue the matter.

Spitzer has subpoenaed several other Wall Street firms but has not filed any charges. Research analysts on whole have been criticized sharply since the fall of Enron Corp., which was a big name that had been recommended by many firms up to the time of the collapse.

"We believe strongly that whatever changes are agreed to as a result of this process should apply to all industry participants," said Merrill chief financial officer Tom Patrick in the firm's earnings conference call.

Patrick emphasized that Merrill is committed to better disclosure, compliance measures and other efforts to restore confidence in analyst research. He also said the Securities and Exchange Commission and other regulatory bodies should get involved in the matter.

"Singling out a particular firm obviously resonates with both" Merrill's financial advisers and clients, said Merrill president Stan O'Neal, who acknowledged that the firm is at risk of losing clients due to the probe.

Earnings results showed Merrill's revenues were down on virtually every front.

Total revenues came to $5.1 billion, a 21% drop from first quarter 2001, contributing to a 26% decline in net earnings of $647 million, or 67c per diluted share, from a year earlier.

Commission revenues were $1.2 billion, down 18% from first quarter 2001, but Merrill noted commissions associated with trading of Nasdaq stocks were higher.

Principal transaction, or trading, revenues fell 49% to $877 million. The firm said debt and debt derivatives trading as well as equity and equity derivative trading revenues were both lower. There was an unrealized gain related to equity investments held by a Merrill Lynch broker-dealer, but that was offset by declines in the market value of selected credit positions in first quarter, Merrill said.

Underwriting revenues of $478 million were 27% lower than a year before.

Strategic advisory revenues declined 36% from due to a reduced volume of completed merger and acquisition transactions.

Asset management and portfolio service fees were $1.3 billion, down 6%, reflecting a market-driven decline in equity assets under management.

Other revenues were $219 million, up $55 million.

Merrill Lynch shares closed up 2c to $48.37. Merrill's convertibles were both flat, with the 0% due 2031 at 50.5 bid, 50.625 offered and the floater due 2032 at 99.5 bid, 99.625 offered.

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