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American Morning

Interview With Andy Serwer of 'Fortune' Magazine

Aired April 16, 2002 - 09:33   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
JACK CAFFERTY, CNN ANCHOR: An investigation by the New York state attorney general has the world's biggest brokerage scrambling to cut a deal. Didn't take long for Merrill Lynch to say, hey, do you want to talk about a deal? Published reports say that that firm is ready to pay substantial fines that will settle questions about its research practices that were raised by one Elliot Spitzer.

The story's a little complicated which is why we call on our buddy Andy Serwer who is the editor-at-large at "Fortune" magazine to sort this thing out.

But Elliot Spitzer got on to something, didn't he?

ANDY SERWER, EDITOR-AT-LARGE, "FORTUNE" MAGAZINE: Elliot Spitzer -- Elliot (ph) Ness we're calling him on Wall Street right now.

CAFFERTY: Yes, there you go.

SERWER: It's funny.

Yes, I mean basically he's got Merrill Lynch over a barrel. Merrill Lynch -- there's Elliot Spitzer right there. It was a 10- month investigation into Merrill Lynch, and basically he's been saying, Jack, that the Wall Street research that Merrill Lynch is putting out is tainted, it is -- doesn't make sense and it's compromised by relationships that the firm has with investment banking clients.

CAFFERTY: This is something that a lot of people on Wall Street have been suspicious of and a lot of members of the investing public have suspected as going on, but he got a hold of some evidence that in fact it's sort of been standard practice.

SERWER: He got a hold of some e-mails that were incredibly damning.

CAFFERTY: Yes.

SERWER: That's to put it mildly, where some of Merrill Lynch's most prominent analysts, like Henry Blodget, who of course was their high-profile Internet analyst, put out -- there's a picture of old (ph) Henry there. He has left Merrill Lynch. And of course he was successfully sued last year by Jake Zemanski (ph), a lawyer representing a guy named Dr. Cangelo (ph), a guy that I met, a doctor in Queens who lost -- you were talking about losing 401(k)s -- this guy lost all of his retirement money, his money for his kid's college. He successfully sued Merrill Lynch and Henry Blodget and they settled for $400,000.

CAFFERTY: I wonder if they're willing to admit to some of these practices that the attorney general has accused them of if that doesn't open the doors for more of the same lawsuits (UNINTELLIGIBLE)?

SERWER: That's right, it could open up the floodgates.

CAFFERTY: Sure.

SERWER: Spitzer wants Merrill Lynch to do three things, admit wrongdoing, change their practices, which is change the rating system and their relationships and also pay huge amounts of fines and maybe compensate some of the people, some of the investors who lost a lot of money. You can see there that Spitzer is actually looking for up to $100 million, according to Charles Gasperino (ph) of "The Wall Street Journal."

CAFFERTY: And that -- that's a who's-who list of names that they're also looking at, Morgan Stanley, Salomon Smith Barney, Goldman Sachs, Credit Suisse First Boston. I mean these are the bluest of the blue buds (ph) down there.

SERWER: That's right. I mean they're looking to do -- make them have research that says three things, buy, sell, hold. Buy means the stock is going to outperform in the market. Sell means it's going to -- hold means it matches the market and sell means it underperforms the market, with no conflicts of interest with those investment banking relationships.

CAFFERTY: Yes. Some said they ought to just legally separate the two units...

SERWER: They're talking about splitting them off (ph).

CAFFERTY: ... and not -- and not allow any cross-pollination at all.

SERWER: They're talking about that like the accounting firms.

CAFFERTY: Yes. Yes. All right, got to run. Thanks, Andy.

SERWER: To be continued.

CAFFERTY: Yes, more to come on this for sure.

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