Lawsuit #1

Merrill Lynch settles lawsuit

An investor had accused the company of a misleading stock recommendation.
July 21, 2001 The Associated Press

NEW YORK -- Merrill Lynch & Co. agreed to pay a former client $400,000 to settle allegations that he was misled by overly bullish research by Internet stock analyst Henry Blodget as well as by information provided by his broker at the Wall Street powerhouse. In an arbitration case filed in March with the New York Stock Exchange, Debasis Kanjilal claimed that he lost about $518,000 in the Internet stock Infospace due to the fact that Blodget had kept a "buy" recommendation on the stock as Merrill Lynch brokered a deal to get another Web company bought by Infospace.

Kanjilal, 46, a pediatrician and father of two who said he had been trying to build and education fund for his children, also claimed that he lost about $311,000 in JDS Uniphase Inc. because of a long-term inflated rating, according to the case filing. A spokesman for Merrill Lynch, the nation's largest brokerage firm, said Friday that it had settled the arbitration case to "avoid the further distraction and expense of protracted litigation."

The case comes as brokerage firms face growing criticism that Wall Street analysts are not independent enough from the companies they tout. They have been accused of being cheerleaders for companies in which their investment firms own stock or for which they do business, giving investors advice that is biased.

The Securities and Exchange Commission warned investors last month to take the stock recommendations of financial analysts with a grain of salt. In Congress, lawmakers are putting together a group of experts to review guidelines for Wall Street.


Lawsuit # 2

"Wild card" fund manager in court in Unilever case
12 November, 2001 10:06 GMT
By Simon Johnson

LONDON (Reuters) -

Alleged management failings at leading fund manager Mercury - fighting a negligence case brought by the Unilever pension fund - will come under further scrutiny in the High Court this week as the fund manager at the centre of the claim takes the witness stand.

In a landmark case that could set a new standard of accountability for underperforming fund managers, the Unilever Superannuation Fund (USF) is suing Mercury, owned by Merrill Lynch since November 1997, for 130 million pounds in damages.

It claims a lack of internal controls allowed Mercury fund manager Alistair Lennard, described by USF counsel as a "wild card", to take excessive risks in running a 600 million pound British stock portfolio for the scheme.

Lennard, who this week follows his former boss, Mercury co-head Carol Galley, on to the stand, will have to defend big bets he took on certain sectors of the stock market which counsel for the USF, Jonathan Sumption, said were inappropriate for the performance target set for Mercury by the USF.

From January 1997 Mercury was assigned to beat its benchmark by one percent but not lag that mark by more than three percent. Lennard, just 27 when he took over the prestigious USF account, sold out of banks at a time when the Mercury Sector Strategy Group, which set strategy for the house and of which he was a part, was still recommending its fund managers overweight the sector.

He also doubled the firm's advised position in general industrial stocks.

Lennard had more than three times the average sector divergence recommended by Mercury and over twice that of colleagues managing similar accounts, Sumption told the High Court last week. "In virtually all sectors Mr Lennard in fact disregarded Sector Strategy Group policy weightings and devised a complete set of sector weightings of his own," Sumption said.

"Some people limit their bets so their speed is... lowered and they do not collide with a bus coming round the corner. Some people go hell for leather for the maximum weightings the way Mr Lennard did and hit something."

Lennard was removed from the account in May 1997 but turning round the one billion pound fund, described by Sumption as a "supertanker" of which the UK portfolio was the major part, proved difficult.

Over the period from January 1997 to March 1998 when Mercury was fired, the fund underperformed its benchmark by 10.5 percent, a figure described by Unilever finance director Hans Eggerstedt as "disastrous" in an acrimonious meeting in November 1997 with Galley, according to USF chief investment officer Wendy Mayall.

SWANSONG

With Mercury's reputation on the line, the case is not the kind of swansong Galley, who leaves Merrill at the end of the year, would have liked. Grilled by Sumption over the last week Galley, dubbed the "Ice Maiden" by the British press for her ruthlessness in wielding Mercury's power in some of the City's biggest takeover battles, has already had to admit to a number of embarrassing gaffes by Mercury on her watch. Mercury's case is that there was nothing inappropriate about the portfolios run by Lennard and that the firm had always been open about the way it was managing the USF's money.

However Galley, who was instrumental in turning Mercury into the UK's biggest pension fund manager, admitted she waited around two years before she told the USF she had handed over management of the account to Lennard in late 1993.

"It is probably not what we would do today," she said.

"I feel it makes us look as if we were not being straightforward and that is the last impression I would wish to make."

Galley also admitted that, although clients were told that asset allocation and sector strategy for fund managers were set centrally, in reality fund managers were "allowed a high degree of autonomy".

A marketing document describing Mercury's process as centralised with fund managers' discretion limited to stock picking sent to the USF in 1995 was "wrong", Galley said.

Finally Galley accepted that, although Mercury agreed to the goal of not underperforming its benchmark by more than three percent, it believed all along that this could not be achieved and concentrated instead on outperforming by one percent. "I do not think it is possible to run a long-term pension fund paying equal attention to the minus three percent and get the plus one percent," she said.

Merrill accepts Mercury performed poorly for the USF fund - the worst returns for any of the 1,600 funds measured by the WM Company in 1996 and 1997. But it denies negligence.

It says it was wrongfooted by changes in the market that culminated in the technology stock bubble which burst in March 2000. Merrill, which is countersuing for 580,000 pounds in unpaid fees and interest, says it told the USF exactly how it was managing the portfolio and the manager results were likely to be different because of its devolved style.

It says that the confidence the USF and its advisers maintained in Mercury until November 1997 was evidence that the portfolio it had been running had been appropriate at all times.

Galley is likely to finish her testimony on Tuesday with the trial expected to last another five weeks.

Mediation Case

Merrill Lynch broker lost $36.3 MILLION for Clients

On May 16, 2000, Hechinger and Gasparino at the Wall Street Journal reported that Merrill Lynch & Co had been embarrassed by two of the company’s own brokers, in separate incidents, resulting in a $750,000 total fine.  Merrill Lynch also agreed to pay the $3000-$5000 cost of customer mediation, as well as a total of $100,000 to a fund for investor education.

The first broker’s name is Richard F. Greene, and the reason for his failure and humiliation is clear to index funds investors.  As an active manager, Greene failed to ensure that his clients’ Risk Capacity™ matched their risk exposure.  Although he does not seem to have devastated his clients intentionally, Greene also failed because of his stock picks and market timing.  Merrill Lynch said there was no systematic problem, that the case included a tiny fraction of its 450 Massachusetts brokers, but the Massachusetts Securities Division alleges that as many as 400 clients lost $30 million!

State securities regulators contend that Greene invested his clients, and himself, in large concentrations of Genesis Health Ventures Inc, Eldertrust Inc, Indymac Mortgage Holding Inc, and Orbital Sciences Corp, little known, high risk stocks that later plunged in value.  Greene ignored his clients’ capacity for risk and did not diversify —then, when the stocks lost 80 percent of their value, the high risk became evident.  Despite a supposed good track record, Greene, 66, fell victim to the bane of active investors and the champion of index investors: diversification and the randomness of news and how it affects the stock market.

The second broker, Donald J. Martineau, pleaded guilty to defrauding clients of $6.3 million; two of his clients were his own brothers-in-law!  Martineau admitted to cutting and pasting signatures from past fund transfer authorizations into current transfer forms!  He would then wire the money into his own account.  As an active manager, it seems Martineau felt compelled to steal because of his huge losses in options trading; the theory that active investing is akin to compulsive gambling seems to be supported by this.  The emotional quotient that index advisors warn about, the need to beat the market, the illusion of control, desperate lows emanating from failure, resulted in an unsuccessful suicide attempt by Martineau in April 1998.  John Macoul lost $245,000, and insists that Merrill Lynch knew about his brother-in-law’s turmoil long before his suicide attempt, while state regulators allege the company should have been aware of the actions of their broker.  Merrill Lynch, learning the reason for Martineau’s attempt, fired him in August 1998.