Defending Merrill

An Internet message board "celebrity" was arrested for securities fraud this week. The indictment includes accusations that Amr Elgindy was bribing federal officials for privileged information regarding criminal investigations of companies or their executives. Elgindy's actions are pretty low, but is there really much difference between what he did and what Wall Street analysts do?

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By Bill Mann (TMF Otter)
May 24, 2002

Amazing. Simply amazing. I am referring, of course, to several things, which I will address directly.

The first is the arrest on Wednesday of Amr Elgindy, better known as "Anthony@Pacific" on several Internet message boards where he posted. Elgindy has been charged with several things, mostly related to securities fraud, racketeering, and extortion.

According to the indictment, Elgindy, who has gained some renown as a short-seller in Internet circles, was paying off insiders at the FBI to give him information about investigations related to public corporations or executives. He would then trade on that information and disseminate it widely on several websites he operated. On some occasions Elgindy and his co-conspirators allegedly approached companies and extorted discounted or free shares by offering to cease smear campaigns. U.S. Attorney Alan Vinegrad said the charges "reveal a shocking partnership between an experienced stock manipulator and law enforcement agents, undertaken for their illicit personal financial gain." Each conspirator faces up to 20 years in jail if convicted.

I think these are despicable acts done by despicable, dishonest people. But I have to ask myself this: With the exception of the illicit use of government information, just what is so different about what Elgindy did trying to bang stock prices down and what Merrill Lynch (NYSE: MER) analysts did in trying to manipulate prices up? Does anyone else think that there is a bit of irony involved in the fact that Elgindy may spend some significant time gaining clarity in the big house, while Henry Blodget and his gang may spend the same amount of time drinking white zinfandel and cooling their jets in their own, substantially more pleasant big houses?

Or how about the folks running Enron, and their auditors? Were their actions not tantamount to manipulating the stock price of their own company for illicit gain? Geez, why isn't Andrew Fastow sitting in a jail cell across from Elgindy and his crew right now? He made millions hiding stuff from people to whom he had a fiduciary responsibility!

Elgindy did all he could to bang prices down, for illicit gain. It appears the information he was using at least had some semblance to being true. The Merrill Lynch analysts disseminated information that was, in some cases, the exact opposite of what they believed to be true, for illicit gain. And the difference would be...?

I'll tell you what the difference is. Elgindy didn't steal enough to be given the same consideration as Merrill Lynch and its analysts, or Enron and its corrupt management. Palm a pack of smokes at the local quick mart, you're going to jail. Torture GAAP to within an inch of its life for personal gain, and well, just don't do it again, sport.

Let me not betray my own feelings, as well as those of my compadres, though. What's happening to Merrill Lynch is a travesty of the law. To that end, we at the Motley Fool have drafted a letter offering our plan for defense of Merrill and any other Wall Street firms that may be facing enormous civil law suits. Its text follows in full.

Dear Mr. Lynch:

Or would you mind if I call you Merrill? I feel like we've known each other for years, since the Fool was launched in 1993. I guess that is years, isn't it, Merrill? We at The Motley Fool have been watching the obviously self-interested actions of Eliot Spitzer regarding alleged misdeeds by people in your analyst and investment banking departments with utter horror. To this end, we would like to offer our willingness to testify on your behalf. We have developed a defense for you that is absolutely destined to succeed. It is my pleasure to give this idea to you, so your analysts can get back to doing what they do best and not worry about civil consequences for their actions. Your defense should be based on the fact that it was bleeding obvious to anyone with an ounce of self-preservation that your analyst reports were deeply conflicted.

There is a legal concept which states that someone can be considered "libel-proof." This condition occurs when someone has developed such a miserable reputation that any additional potentially libelous statements just can't do much more damage. That is your analyst group, and we, The Motley Fool, are your proof. I can just sense your excitement!

You see, Merrill, the whole reason that The Motley Fool was founded back in 1993 was because we recognized the fact that Wall Street analysts and full-service brokers were serving up advice and information that was rife with self-interest and deep, unsolvable conflict. We KNEW that your analysts had no choice but to speak glowingly about companies that you were also providing banking to, or even ones that you wanted to provide banking to. We told everyone we could think of not to listen to the dreck you called research. (No offense, Merrill. When I say "dreck" I'm using it in a strictly legal sense.) Millions of people, all of whom were interested in investing, knew for a fact that listening to analysts was hazardous to their financial future.

Your analysts were, I must say, BRILLIANT at helping us prove our point. The whole Washington Post news article where the reporter followed Henry Blodget around for a day while he gabbed about investment banking deals, not equity analysis, was a masterstroke, only to be outdone by his waiting until companies had dropped 80% and 90% before downgrading them. And yet, those snakes at CNBC and The New York Times still did everything they could do to make your analysts look respectable. Please, Merrill, when you're up on the stand, resist the temptation to blame them for their incompetence, their dastardly efforts to make your analysts look like they actually analyzed. They knew not what they were doing, and it will be damaging to our perfect defense.

Despite our efforts to tell the world that Wall Street analysis is hopelessly corrupt, some poor souls slipped through the cracks and took what the Wise were saying -- including your analysts -- at face value. But should you be blamed, having made it so clear, so obvious that the game you were playing had nothing to do with providing the public with objective advice? Heck no! If some are unable to see the hazards that you and we have so clearly highlighted, then you should be able to absolve yourself of responsibility. We at The Motley Fool have done everything in our power to let people know that they should listen to analysts only at their own peril. We've known for a little short of a decade, and we stand ready to speak to this regard in your defense.

We like to attach cute names to everything. I suggest that we call this the "scorpion defense." If you play with a scorpion, should it be a surprise when you get stung? No. Stinging is a part of the nature of a scorpion. It cannot be anything else. Just so, should the analyst be blamed when an investor listens to him and gets stung? You can figure out the rest, but the conclusion is "heck no!"

Let us know how else we can help, and please feel free to share our offer with your friends Morgan, Credit, Robertson, Salomon, and J.P.


Bill Mann

And an aside
My final point of amazement this week is the absolute obsession some of those around me seem to have with the Celebrity Boxing matches, Fox's latest stroke of genius. A commentator in my area was saying that this week's fights were completely disappointing, and that he could not believe how coarse America was becoming (I missed them due to a schedule conflict with my favorite hockey team), but then admitted that if the matchups were compelling, he'd watch again. Given that, I'm sure our friends up at News Corp. (NYSE: NWS), the parent of Fox, are crying into their money at the whole "coarse" comment.

To my friends at Fox: I'd be interested in a Blodget-Elgindy thrombo, but in that case I'd probably be rooting for the canvas.

Fool on!
Bill Mann, TMFOtter on the Fool Discussion Boards

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Bill Mann's not much of a fight fan, but he can make exceptions. He owns none of the companies mentioned in this article. The Motley Fool is investors writing for investors.