NEW YORK — Merrill Lynch & Co. will pay a $100 million fine and change compensation for its stock analysts in a settlement designed to usher in a new era of analyst independence on Wall Street.
The agreement reached Tuesday with New York Attorney General Eliot Spitzer requires Merrill Lynch to stop rewarding its 800 analysts for helping the firm win investment banking fees for arranging mergers and new stock offerings.
Spitzer charged that some Merrill Lynch analysts misled investors by rating shares of companies highly so they could get investment banking business from the same companies.
Now Merrill Lynch's analysts will be paid only for the quality of their stock research and won't get any money from the firm's investment banking division.
"By adopting the reforms embodied in the settlement, Merrill Lynch is setting a new standard for the rest of the industry to follow," Spitzer said.
The nation's biggest brokerage also apologized and agreed to put in place structural reforms to ensure its stock analysts work independently from the firm's investment bankers.
Spitzer said he hopes the Securities and Exchange Commission, which regulates brokerages, will require all Wall Street firms to comply with the terms.
Spitzer said he spoke with SEC chairman Harvey Pitt yesterday morning before announcing the settlement, but did not disclose details.
Annette Nazareth, the SEC's director of market regulation, praised Spitzer's work on the issue but said the SEC would continue with its own probe. She said the SEC would work with Spitzer on analyst reforms, but she did not indicate whether the settlement's terms would be proposed as rules.
"While this settlement is an important milestone for investor protection, it is not the finish line, and will not preclude our own efforts on behalf of the investing public," Nazareth said.
New York state will get $48 million, and the rest of the money will be given to the remaining 49 states and the District of Columbia and Puerto Rico as long as they accept the settlement's terms.
Spitzer, however, made a major concession by dropping a demand that Merrill Lynch admit wrongdoing — which would have crippled the brokerage's defense in at least 30 lawsuits filed by investors who blamed their losses on overly optimistic stock ratings.
"It would have in essence been a death warrant for the company to admit liability," Spitzer said. Several weeks ago, Spitzer also dropped a demand that Merrill create an investor restitution fund.
In a 10-month investigation, Spitzer's investigators uncovered e-mail messages from analysts that disparaged shares of Internet companies they rated as good buys for investors.
Some used vulgarities to describe the stocks in messages that Merrill Lynch chairman and chief executive David H. Komansky called embarrassing to the company.
Komansky said the investigation and its revelations hurt Merrill Lynch's image, but said he did not believe the firm lost much business as a result.
"I think we'll be able to regain the confidence of the investing public," he said.
The settlement goes far beyond efforts by the SEC and industry groups to reform analyst stock ratings and analyst compensation, said Benjamin Mark Cole, author of "The Pied Pipers of Wall Street: How Analysts Sell You Down the River."
"If analysts really are not paid from investment banking and attempt to pick stock winners, that will be a meaningful reform," he said.
However, Cole said the settlement's true impact on analyst independence won't be clear for years. He also warned that analysts' jobs could still be threatened if they issue negative stock ratings on companies valued for their potential investment banking revenue.
"One has to wonder if brokerages will still fire analysts for not playing ball," he said. "If they see that one of their buddies got fired for calling it like he sees it, what are they going to do?"
Merrill Lynch stressed that the agreement "represents neither evidence nor admission of wrongdoing or liability," and Komansky said the company would defend itself from the investor lawsuits generated by Spitzer's investigation.
Lawyers who filed those lawsuits were hoping for an admission of liability to bolster their cases, but weren't surprised Merrill Lynch refused to give one, said Jill Abrams, an attorney with Abbey Gardy LLP in New York.
Investors still will likely win settlements because Spitzer uncovered evidence lawyers can use, and Merrill Lynch apologized for the e-mails, she said.
"They're not saying: 'It never happened, we didn't do it,'" Abrams said.
Spitzer said prosecutors have already had talks with some of Merrill's Wall Street rivals about alleged analyst conflicts of interest but declined comment on whether similar settlements are expected soon.
Spitzer's investigators have subpoenaed records from at least six of Merrill Lynch's main competitors, including Goldman Sachs Group Inc. and Morgan Stanley Dean Witter & Co.
Yesterday, Goldman Sachs announced steps to try to ensure the neutrality of its research.
The firm issued a policy statement emphasizing "the analytic rigor, broad insights and objectivity" of researchers' work. And it named former New York Federal Reserve President E. Gerald Corrigan as "investment research ombudsman" to deal with any conflict-of-interest questions.
Merrill Lynch shares rose 47 cents yesterday to $43.85 on the New York Stock Exchange, while Goldman Sachs shares fell $1.04 to $79.20.
