Last week, shares of Merrill Lynch plunged 11.4% to $55.10 upon reports that the firm had suffered one of the largest Wall Street losses in history. The $7.9 billion write-down, resulting from its mortgage-related trouble, came after projecting a few weeks earlier that the write-down would be $4.5 billion.
Within days, the firm ousted Chief Executive Stan O'Neal.
"Merrill Lynch must do more than simply change the window dressing at the top and the board of directors needs to look in the mirror for their own failures and really clean house in order to escape almost certain collapse," said Schooley.
In mid-July, Merrill reported better-than-expected earnings with little impact from exposure to mortgage-backed securities. Two weeks later, O'Neal personally sent an email to Merrill employees assuring them the firm had such risks well in hand, according to the Wall Street Journal. The infamous collapse of Enron involved attempts by top executives to hide problems through off-balance-sheet transactions.
At the end of September, the firm reported reducing its involvement with risky securities, such as sub-prime mortgages, to $20.9 billion -- half of the $40.9 billion it quoted in June. Yet, write-downs for that cycle revealed an $11 billion gap.
The question now being asked by investigators is whether there was an attempt by Merrill Lynch to cover up failures through private transactions hidden from investors. Merrill has issued an official non-denial denial to the charges, saying: "We have no reason to believe that any such inappropriate transactions occurred."
The SEC is specifically questioning whether Merrill brass engaged in deals with hedge funds meant to postpone disclosure of its losses, taking as much as $5 billion in mortgage-related securities off its books.
In 2002, former New York State Attorney General Eliot Spitzer (now NY Governor) revealed that the firm's analysts had intentionally deceived clients, with the number of investors hurt by their deception ranging in the hundreds of thousands if not millions. While Merrill Lynch agreed to enact a series of industry reforms, pay out fines ranging in the hundreds of millions of dollars and settle dozens of class action lawsuits, as late as January 2007 company brokers were still being convicted of fraud.
Schooley's book, slated presently for international release, cites the company's widespread cheating scandal, senior management and board cover-ups as an example of their failures -- past, present, and, likely, future -- which go to the heart of Wall Street's concerns.
"The new SEC investigation is likely the result of the dishonest culture allowed by senior management and the board," said Schooley. "The failure to appropriately clean house at the highest levels and change the culture places shareholders and clients at risk. Bottom line -- without making these critical changes, the ship may just sink."
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