Merrill's Research May Slow Auction-Rate Settlement (Elinor Comlay)

NEW YORK (Reuters) - The legacy of Henry Blodget may haunt Merrill Lynch & Co Inc (MER.N: Quote, Profile, Research, Stock Buzz) as it negotiates a settlement with regulators for the way it sold auction rate securities to investors.

Blodget, you'll recall, was a Merrill analyst who earlier became the poster boy for the excesses of the Internet era when he was caught publicly recommending stocks he privately dismissed in e-mails.

{xtypo_quote_left} "This company was aggressively selling (auction rate securities) to investors and its auction desk was censoring the research analysts to make sure they downplayed ARS market risks in research reports up to the day Merrill pulled the plug on its auctions," {/xtypo_quote_left} 

While five other banks have settled with state regulators over their sales practices for the notes, legal experts say a deal with Merrill Lynch may take longer because of the firm's history of tainted research and evidence research may have been influenced in this case.

Documents seem to show Merrill Lynch analysts were pressured to write positive reports about auction rate notes, which were sold to investors as safe cash equivalents, but have proven increasingly difficult for investors to sell at face value over the last year.

That pressure on analysts follows Merrill's 2002 settlement with regulators over conflicts in research and could make settlement talks with New York Attorney General Andrew Cuomo much more drawn out and acrimonious.

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