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With Spitzer Case Settled, Merrill Now Faces Angry Public

Eliot Spitzer, the bulldog attorney general who extracted a $100 million settlement payment from Merrill Lynch (MER:NYSE – news – commentary – research – analysis), says that’s just a down payment for compensating aggrieved investors.

To be sure, none of the money that Merrill agreed to pay in this much-anticipated deal will go to investors who believe they were led astray by suspect Wall Street research — the subject of Spitzer’s probe. But the New York attorney general clearly expects that today’s settlement, which allocates $48 million to New York state and $52 million to other states that agree to sign on, will give ammunition to investors seeking restitution for their loses. Spitzer said private lawyers are expected to file arbitration claims and class-action lawsuits seeking “billions of dollars.”

“The individual investor has been harmed the most by this,” Brad Maione, a spokesman for Spitzer’s office, recently said.

Their Work Cut Out

Still, what Spitzer expects to be the next phase, the one in which investors get their chance to recover loses attributable to the conflicts of interest that are said to be endemic to Wall Street research, will be no slam dunk. Merrill was careful to acknowledge no wrongdoing as part of the settlement. And even attorneys say that unless investors have direct evidence that they were duped directly by Wall Street research, their arbitration claims and lawsuits will face uphill battles.

At a press conference this afternoon, Merrill Chief Executive David Komansky said he doesn’t believe investors who pursue lawsuits should be awarded class action status, without which investors’ attempts at restitution could be hampered.

Jacob Zamansky, the attorney who last year successfully filed arbitration claims against Henry Blodget, Merrill’s former Internet analysts, said that hundreds of investors have contacted him with complaints that they were misled by corrupt analysts’ research. But so far, Zamansky has filed just two arbitration cases. Those he has represented, Zamansky said, have documented proof that they asked for, received and used analysts’ reports to make investment decisions.

And they are clearly in the minority, he says.

Indeed, industry observers say that while it’s easy for investors to show that they have lost money on their investments, it’s far more difficult to show that analysts’ recommendations were the direct cause of those losses. While individual investors have access to Wall Street research via their brokers, and more recently, through the Internet, big institutions rather than small investors are the main users of this research.

A spokeswoman at Multex Inc., which sells Wall Street research on Internet sites such as for institutional investors and for retail subscribers, said individual purchasers are in the minority. “Institutional is the core or our business. It’s at least 70% of our business,” says Samantha Topping, company spokeswoman.

A spokeswoman for Merrill said recently that she has never seen data describing what type of customers receive Merrill’s research. Representatives for other major brokerage firms gave similar responses, with the exception of Lehman Brothers (LEH:NYSE – news – commentary – research – analysis). A spokesman for that firm said most of its research goes to institutional investors, the bulk of Lehman’s client base.

The Various Uses of Research

Investors who work with a stockbroker also tend to have access to Wall Street research. But anecdotal evidence suggests that few individual investors are close followers of Wall Street reports.

On a recent afternoon at a Charles Schwab (SCH:NYSE – news – commentary – research – analysis) office in Chicago, all but one of the investors visiting the office said they have never requested analysts’ research, with several saying they didn’t trust the information.

But one Schwab customer, Dimitri Arges, said he has bought analysts’ research on a regular basis. He does so because he doesn’t use a broker and relies on his own research to make investment decisions. For those who do rely on a broker, Arges said, “caveat emptor.”

“Brokers are clouded by the recommendations. You’re better off going to the library and getting Value Line,” he said.

Other attorneys following the Merrill settlement said today’s announcement was not a windfall for investors for other reasons.

“It changes the atmosphere,” said Fred Isquith, a New York attorney who has a class-action lawsuit pending in New York regarding manipulation of initial public offerings and another case pending on securities issues of 310 companies. But he doesn’t think Spitzer’s victory will substantially affect his cases.

Spitzer’s investigation of Merrill may lead to investigations of other firms, but it’s still unclear how that will aid in investors’ attempts at restitution.

“He says he’ll look at the rest of them,” Zamansky said of Spitzer. However, an investigation could be a moot point if firms on their own agree to adopt similar policies that Merrill has agreed to as part of today’s settlement. Those changes include completely separating analyst compensation from its investment banking business.