Multiple Wall Street Firms to Face Separate State Probes of Research
States Divide Up Investigations Into Analysts
On the Heels of Merrill's Deal With New York
By MICHAEL SCHROEDER
Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- On the heels of New York Attorney General Eliot Spitzer's huge settlement with Merrill Lynch & Co., state regulators and attorneys general are gearing up separate inquiries into research-analyst conflicts at other major Wall Street firms.
Mr. Spitzer and state securities regulators plan to use the Merrill settlement as the blueprint for seeking more financial settlements and analyst reforms from other major firms, especially those with customers nationwide. Indeed, on Wednesday, a second Wall Street securities firm, the Salomon Smith Barney unit of Citigroup Inc., said it would adopt the same research-reform framework.
ANALYZING THE ANALYSTS
Most members of the state task force have agreed to oversee individual investigations covering about a dozen major firms. Mr. Spitzer will concentrate on Salomon Smith Barney and Morgan Stanley & Co.; Massachusetts will handle the investigation of Credit Suisse First Boston, a unit of Credit Suisse Group; and Connecticut, the UBS PaineWebber unit of UBS AG, according to people with knowledge of the arrangement.
In addition, Texas and Alabama are teaming up to scrutinize J.P Morgan Chase & Co. and Lehman Brothers Holdings Inc.; New Jersey, Bear Stearns Cos.; California, Deutsche Bank AG's Deutsche Bank Securities and Thomas Weisel Partners; and Washington state, U.S. Bancorp unit Piper Jaffray. Utah is responsible for the probe targeting Goldman Sachs Group Inc., a Utah state official confirmed.
Representatives for CSFB, Morgan Stanley, Salomon Smith Barney and Thomas Weisel declined to comment, while a spokeswoman for Piper Jaffray said the firm doesn't confirm or deny investigations. Representatives for Goldman, PaineWebber, Lehman, J.P. Morgan, Bear Stearns and Deutsche Bank Securities didn't return phone calls.
At the heart of the investigation is the changed role of Wall Street analysts. For years, they toiled in relative obscurity, writing reports on the financial conditions of companies or industries, forecasting earnings and recommending which stocks investors should buy or sell. But with the 1990s boom on Wall Street, securities firms competed to underwrite record numbers of new stocks and record fat fees. The firms' analysts, instead of simply assessing the stocks, increasingly and publicly promoted them.
Some lawmakers and Securities and Exchange Commission officials are concerned that action by the states could set a dangerous precedent and lead to a Balkanization of securities laws as each state weighs in with its own mandates.
To settle the New York state inquiry into allegations that Merrill gave investors overly rosy research reports about the stocks of its investment-banking clients, the nation's largest brokerage firm agreed to pay New York and other states $100 million and change how it monitors and pays its stock analysts. In its settlement, Merrill didn't admit any wrongdoing.
On Wednesday, Salomon Smith Barney chief executive Michael Carpenter said in a memo to employees that also was delivered to Mr. Spitzer, "the reforms embodied in the settlement set a new industry standard necessary to maintain investor confidence and provide a useful template for the rest of the industry to follow. Today I am pleased to announce that we are embracing that standard."
Mr. Carpenter said his firm would "separate completely the evaluation and compensation of equity research analysts from investment banking consistent with the guidance in the agreement," and plans to set up a research review committee as well. Industry experts have noted that the Merrill settlement still allows analysts to operate in tandem with investment bankers in pitching for new underwriting and merger deals, and to be paid for such work with some new limits. Mr. Spitzer said the move was a good step but that his investigation would continue.
Last month, after Mr. Spitzer expanded his inquiry to include all the major firms, many state securities regulators expressed interest in participating.
If the states press cases against the firms, it is unclear how settlement money would be divided. In the Merrill deal, the firm agreed to pay New York $52 million, with the remaining $48 million divided among 49 states, including $2 million paid to an organization representing state securities regulators.
Recently, the task force drew up a plan to press the probes beyond Merrill. To streamline the investigative process, individual states are spearheading investigations but will be assisted by some other states. New York, New Jersey, and California are serving as co-chairs of the task force, said Marc Beauchamp, executive director of North American Securities Administrators Association. He said the task force has grown to 30 members from 12. "We took all the firms we wanted to look at and split them up among states in the task force," said S. Anthony Taggart, Utah's director of securities.
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