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Merrill Lynch Stock Ratings

Zack Urlocker
Sunday, April 21, 2002

Related News:

'POS' Designation Not Always Bad

Straight from the Bull!(New York, NY) In response to an affadavit filed by the New York Attorney General's office that Merrill Lynch's Internet Research group has misled investors, Merrill Lynch has issued new guidelines to it's employees. "I am shocked --shocked to find that our analysts promoted stocks based on our investment banking business," said Louis Trabant, director of SEC compliance at the firm.

Eliot Spitzer, New York Attorney General and nine-time olympic gold medalist, claims Merrill Lynch's research is tarnished by an undisclosed conflict of interest with analysts acting as quasi-investment bankers for the firms they covered. An affadavit filed by the Attorney General further states that Merrill Lynch analysts manipulated research findings and Internet stock ratings in order to generate higher revenues for the firm and to look cool on CNBC.

Merrill Lynch claims that the firm has clear guidelines to separate the bankers from the analysts so that the advice is always independent and objective. "Of course we're objective," Trabant said. "Our objective is to make a lot of money. And boy, did we ever!"

In response to the Attorney General's complaint that Merrill Lynch's five-point rating scale was flawed since there was never a single "reduce" or "sell" recommendations issued during a two and a half year period, the company has proposed a simpler system. "We feel this new three-point system better reflects the spirit of objective investment analysis better than the old one," Trabant said. Going forward, Merrill Lynch will use the following stock ratings:

1. "Buy Gosh" 20% or more appreciation per year, plus tips
2. "By Golly" 20% depreciation per year, assuming routine maintenance and oil change
3. "Bye Bye" 90% or more price drop by the time your sell order is entered

"Now if we say something's a 'Buy' we really mean it," Trabant said.

All the way to the bank

Henry Blodget, former director of the Internet research group from 1999 to 2001, helped bring in $115 million in banking fees to the company by issuing positive reports on companies such as Pets.com, Quokka Sports, WebVan, Buy.com, Internet Capital Group other stocks that are now traded on eBay as gag gifts.

Blodget maintained a buy rating even as many Internet stocks lost 90% or more of their value. Blodget claimed he was "not really in the loop" on stocks that declined. "I only cover stocks when they go up," he said. "Much less risk involved. Maybe we missed a few calls," he added, "but, we felt that it was unlikely that any of the stocks would trade below zero, and on that front, we were completely vindicated."

Blodget is named in the affadavit for his role in manipulating stock ratings and misleading investors. In internal documents and emails, Blodget has been quoted as calling stocks "crap", "toast" and "POS" ("piece of s---") while simultaneously having "Buy" recommendations on them. In one case, he held a buy recommendation on InfoSpace while the stock went from $261 to $13. The stock remained on the Merrill Lynch "Favored 15" listing despite Blodget's email to colleagues calling the stock "a piece of junk" and the CEO a "sleazebag." Blodget later claimed that the term "sleazebag" was a term of endearment he often used. Blodget finally issued a research note lowering the rating on the stock after InfoSpace's Vice President filed a lawsuit against InfoSpace's CEO alleging securities violations, racketeering and contributing to the delinquency of an underage goat. "There was a lot of debate on that one, I can tell you," he said. "But we felt it was the best thing to do to protect the rights of goats everywhere."

Trabant claims that his firm has made amends since Blodget's departure last year. The firm has recently clarified some of the terms that were in the filing made by the supreme court. "People throw around these terms like 'piece of s---' as if they are negative," Trabant claimed. "These are well-defined financial terms our analysts learn as part of their professional training. We don't expect that laymen necessarily understand these terms, so we've gone ahead and defined the terms for our employees and clients." The terms and their definitions are listed below:

POS - Position of Strength
CRAP -- Could Really Accelerate Performance
TOAST - Top of All Securities Tracked
Turkey - a great stock to give thanks over
Dog - Man's best friend

Blodget is currently vacationing on a remote island he purchased in the South Pacfic and could not be reached for comment.

About the author
Zack Urlocker is a pseudonym for a Silicon Valley software executive who frequently gets calls from stock brokers during dinner.

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