NEW YORK - After having abuse heaped on them for months by critics and members of Congress, analysts accused of constantly issuing rosy stock forecasts were hit with another salvo this past week, from New York's attorney general.
Eliot Spitzer embarrassed Merrill Lynch & Co. by making public a series of internal e-mails suggesting that the firm's Internet sector analysts had grave doubts about the very companies they were recommending investors buy.
In one e-mail from 2000, an analyst criticized ExciteAtHome while Merrill Lynch reports rated it highly. In another internal message the same year, an analyst wrote that InfoSpace was a "piece of junk," while the company's Merrill Lynch rating was the best possible.
Mr. Spitzer accused Merrill Lynch of misleading investors, and the company countered that the claims were baseless and that the e-mails had been taken out of context.
The two sides are now negotiating over a court order Mr. Spitzer obtained that directs Merrill Lynch to provide more disclosure about the investment banking business it does or hopes to do with companies that its analysts rate.
Critics have long contended that Wall Street analysts face pressure to rate some companies positively in return for lucrative fees the brokerages earn from those companies, arranging their mergers and acquisitions deals or new stock offerings.
While the Securities and Exchange Commission and industry groups are working on reforms, experts said Mr. Spitzer's investigation could serve as a big club to shame the industry into taking steps that would make analyst reports more objective.
After releasing details of his 10-month investigation Monday, Mr. Spitzer's office said other firms were also subject to the inquiry. A source close to the investigation who spoke on condition of anonymity named a number of Merrill Lynch's biggest competitors.
If Mr. Spitzer finds e-mail evidence suggesting coordination between analysts and investment bankers on research reports published by other firms, it will give him more ammunition to force changes, said Don Langevoort, a securities law professor at Georgetown University and former SEC lawyer.
Observers predicted Mr. Spitzer would release publicly any additional evidence he finds, which could have more impact on reforms than moves afoot by the SEC and the industry to restore confidence in analysts.
"You just nail them and create that fear that regulators are looking and are not going to tolerate actual abuse," Mr. Langevoort said.
In an interview, Mr. Spitzer said efforts to settle the case before he obtained the court order were stymied in part by Merrill Lynch's attempts to prevent release of the e-mails.
The e-mails also showed that Merrill Lynch analysts were frustrated by pressure to maintain stock ratings high, Mr. Spitzer said.
In one, star Internet analyst Henry Blodget voiced his concern, writing that he was becoming less inclined "to cut companies any slack, regardless of predictable temper tantrums, threats, and/or relationship damage that are likely to follow."
Experts doubt Mr. Spitzer will succeed in one of his goals: Persuading Merrill Lynch and its competitors to spin off their research arms as separate entities so they become truly independent. That's because the research divisions don't make enough money to survive on their own.
But Mr. Spitzer might succeed in getting big Wall Street firms to restrict communication between analysts and investment bankers, said Robert Heim, a lawyer who was formerly assistant regional director in the SEC's New York office.
"At the end of the day I think there will be some changes but they won't be the systematic changes that the attorney general is looking for," Mr. Heim said.