Everyone expected Merrill Lynch (MER) President E.Stanley O'Neal, 50, to become chief executive of America's No. 1 brokerage. They just didn't realize it would be so soon. On July 22, Merrill announced that O'Neal will succeed David Komansky as CEO in December. Next April, Komansky, 63, will retire as chairman, and O'Neal will assume that post, too. He will be the first African American to run a top investment bank.
Since becoming president in July, 2001, O'Neal has led Merrill through a painful restructuring, shedding thousands of jobs amid a market meltdown. His next challenge will be to achieve Merrill's goal of posting a 24% pretax margin next year. O'Neal is on his way. In the second quarter, pretax margins rose four percentage points, year on year, to 19.1%, despite an 11% decline in net revenues. Excluding a $100 million settlement with New York State Attorney General Eliot Spitzer and related costs, Merrill's pretax margin was 21.4%. Chalk up a major win for corporate reformers--and Democrats. The accounting bill adopted by House and Senate negotiators on July 24 differed only slightly from Senate Democrats' tougher version. Business and accounting lobbyists had counted on killing the bill, championed by Senate Banking Committee Chairman Paul Sarbanes (D-Md.), but their clout melted away after WorldCom's bankruptcy. The bill, which President Bush is expected to sign in August, establishes an independent board to write auditing rules and discipline wayward accountants. It also bars accounting firms from consulting for their audit clients and cracks down on Wall Street's conflicted analysts. House Republicans did raise the bar on criminal prosecution of executives: Prosecutors can only charge violations that are committed knowingly, not recklessly. But execs who are caught will face stiffer penalties, with sentences as long as 25 years. One thing the bill won't do: boost the SEC to Cabinet rank, as requested by Chairman Harvey Pitt. Alleging "One of the most extensive financial frauds ever to take place at a public company," the SEC on July 24 charged Adelphia Communications founder John Rigas, two sons, and two other executives of the Coudersport (Pa.) cable company with hiding off-balance-sheet loans, enhancing operating earnings by falsifying information, and "rampant self-dealing" that included buying stock, condos, and timberland with company funds. The defendants, if convicted, face up to 30 years in prison and millions of dollars in fines. Another Rigas son was named in the SEC complaint but was not arrested. The bad news keeps coming in the power-merchant and energy-trading sector. On July 23, shares of virtually every player tanked on troubling reports from Williams (WCG), Dynegy (DYN), and El Paso (EP). On July 22, Williams said its struggling energy marketing and trading business would cause it to report a second-quarter loss. Shares sank 77% in two days. On July 23, Dynegy stock plunged 64% after the company slashed its cash-flow outlook for 2002. That day, El Paso shares fell 23% on concerns about a venture in its electricity-restructuring business called Project Electron. It's at the center of a series of complex off-balance-sheet partnerships that helped El Paso book millions in profits years before they'll be realized, while keeping billions in debt off its books.
The company says it followed accounting rules. AOL Time Warner's (AOL) efforts to hold off the advertising bust have roused the SEC. On July 24, CEO Richard Parsons acknowledged that the agency was conducting a "fact-finding inquiry" into America Online's accounting. It comes after The Washington Post reported how the AOL unit used aggressive measures--including bartering ads for computer equipment and settling lawsuits with ad deals--to bolster ad revenues and meet Wall Street's targets for three quarters in 2000 and 2001. AOL has denied any problem with ad accounting. Martha Stewart's insider trading battle is biting into her company's fortunes. On July 24, Martha Stewart Living Omnimedia (MSO) said it expects profits of 6 cents to 7 cents a share in the third quarter--less than half analysts' projections. Stewart is fighting allegations that she had inside information in dumping shares of drugmaker ImClone Systems (IMCL)--and now investors are suing the banks that handled her IPO, calling it rigged. -- Hewlett-Packard (HPQ) said it will no longer sell printers through its rival Dell.
-- Amgen's (AMGN) second-quarter profits rose 28%, and the FDA O.K.'d its anemia drug.
-- The New York Stock Exchange may build a trading floor away from Wall Street. Investors shed Lucent Technologies (LU) shares after it posted a $7.91 billion loss on July 23, its ninth straight red-ink quarter. The telecom-equipment maker's shares tumbled 21%, to $1.65, as it lowered earnings guidance for the year and announced 7,000 job cuts. Said CEO Patricia Russo: "Capital-spending constraints have intensified."