Merrill is Third Bank Hit by Fraud Finding

February 18, 7:30 pm ET
By Adrian Michaels and Gary Silverman in New York and Joshua Chaffin in Washington

Merrill Lynch has become the third leading investment bank to be hit by an allegation of securities fraud as part of the settlement of conflicts of interest on Wall Street. Citigroup's Salomon Smith Barney unit and Credit Suisse First Boston will also face a finding of fraud when the final settlement document is published in the next few weeks.

Like Citigroup and CSFB, Merrill will neither admit nor deny the fraud allegation, meaning it will be inadmissible as evidence in court. However, the use of the word "fraud" in the settlement document could aid class-action lawyers seeking millions of dollars in restitution for investors.

Twelve securities houses are part of the so-called "global" settlement with a coalition of regulators over their conduct during the internet and high-technology boom of the late 1990s. They are accused of publishing overly rosy equity research to win lucrative investment banking business.

The settlement with regulators - including the Securities and Exchange Commission, the New York attorney-general, the National Association of Securities Dealers and the New York Stock Exchange - provides for Wall Street to pay fines and fund independent equity research and investor education. The banks have agreed to pay a total of $1.48bn, but the settlement details have not yet been agreed.

Ten banks - Merrill, CSFB, Citigroup, Goldman Sachs, Morgan Stanley, Lehman Brothers, Deutsche Bank, Bear Stearns, UBS Warburg and JP Morgan Chase - have in the past few days been sent a "record of findings" by regulators, which details the allegations against them. Only US Bancorp Piper Jaffray and Thomas Weisel Partners are still waiting.

The banks will reply this week and a final list of findings could be announced within a month. None of the banks or regulators would comment. No bank is expected to admit or deny the findings, reducing the potential impact in private investor lawsuits. But lawyers will seize on fraud findings in their efforts to seek damages.

Additional reporting by David Wells in New York
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