Goldman Could Be out of Reach

Even as regulators take aim at some of Wall Street's oldest habits in their expanding probe of equity research, there's reason to believe the industry's pecking order won't be completely thrown out in determining who faces the biggest threats.

That's the basic argument of a note Friday morning suggesting the Street's most storied franchise,

Goldman Sachs

(GS) - Get Report

, might be shielded from harm in the probe because most of its dealings are with corporate clients rather than retail investors.

Merrill Lynch

(MER)

, whose own research department was the focus of the probe by New York Attorney General Eliot Spitzer that started the hand-wringing, said in a note Friday that rival Goldman has limited exposure to real harm from the probe in part because it has few dealings with the hoi polloi.

"Goldman Sachs may be somewhat less exposed to current investor concerns regarding customer litigation from research practices given the firm lacks a mass-market private-client business," Merrill wrote in upgrading its intermediate-term rating of Goldman to buy from neutral. "While we recognize the risk of new forms of regulation may impact the full industry, we believe Goldman Sachs may be seen by many investors in the short term as being less exposed to customer litigation risk."

That risk was cited by securities industry experts as perhaps the biggest threat faced in the widening probe of conflicts of interest among Wall Street investment analysts. The probe, whose backers Thursday came to number

Securities and Exchange Commission

Chairman Harvey Pitt and other groups, has sent the share prices of several top brokerages down more than 20% since first being announced about a month ago.

Merrill, whose former Internet analyst, Henry Blodget, was cited by name in Spitzer's affidavit, also pointed to Goldman's diversification into trading operations as a reason to think it will be able to weather the current mean season among brokers. But with investors increasingly uninterested in anything but Spitzer and Pitt, it was litigation risk that was likely to have the most resonance.

Boyd Page, a securities lawyer with Page Gard Smiley & Bishop, said total industry liability could run to nine digits. "We've got hundreds of millions of dollars of exposure in connection with these analysts cases. Think of all the people that were in the marketplace, who had never been in it before. Based on the assurances of these analysts, you'd be pretty mad," he said.

That's where the rest of Wall Street has reason to worry. Securities lawyers say the escalating conflicts-of-interest scandal could result in an explosion of individual civil suits and class action suits against firms and the analysts, leading to individual settlements of up to $100 million, according to some estimates.

Attorney Jacob Zamanzky, who won a $400,000 settlement after suing Merrill over Blodget, is currently seeking $10 million in damages from Salomon Smith Barney analyst Jack Grubman. Zamanzky says he is now handling at least a dozen cases targeting various parties including Morgan Stanley analyst Mary Meeker, who saw a class action suit against her tossed out last year, Blodget and Grubman, as well as Credit Suisse First Boston analysts.

"I'm having a lot of people call me," said Zamansky, who only works with individual cases. "I'm sifting through them and applying very high standards. If the investor can show he relied on the integrity of a research report, I take on the case."