Expanded New York state investigation spooks analysts
By Per Jebsen
NEW YORK, April 10 (Reuters) - Wall Street analysts probably are getting nervous about those unvarnished, tell-it-all e-mails they wrote about their top stock picks.
The New York State attorney general's office on Monday castigated Merrill Lynch & Co. <MER.N> and used internal e-mails to show the Wall Street firm's analysts boosted stocks in public but disparaged them in private. The attorney general isn't picking only on Merrill.
"We have issued a number of subpoenas to other major Wall Street firms," said Juanita Scarlett, a spokeswoman for the attorney general's office.
Spokeswomen for Credit Suisse First Boston <CSGZn.VX> and Morgan Stanley <MWD.N>, which have been reported to have received subpoenas, declined to comment.
The New York attorney general, Eliot Spitzer, on Monday obtained a court order, which has been stayed for three days, requiring Merrill to disclose potential conflicts of interest in its research reports. Spitzer charged that Merrill's Internet group, headed by star Web analyst Henry Blodget, had tailored its research to attract investment banking business.
Spitzer's inquiry uncovered a raft of e-mails and documents providing evidence for a proposition that hasn't exactly been a secret: Wall Street analysts recommend stocks of companies not to provide investors with disinterested advice, but rather to help their investment banker colleagues win lucrative financing business from companies.
"I suspect that there are many analysts anxiously going through their old e-mail files to see if they have any smoking guns," said Charlie Crane, strategist at Victory SBSF Capital Management, which oversees $4 billion.
Yet the evidence developed by the New York attorney general appears to provide dramatic confirmation that the conflict between providing advice and winning business has been resolved in favor of the latter.
In the e-mails and documents, Merrill analysts privately disparaged companies such as Aether Systems Inc.<AETH.O>, InfoSpace Inc. <INSP.O>, and 24/7 Real Media Inc.<TFSM.O> as pieces of "junk" or worse, while publicly giving them top recommendations, and detailed their efforts to attract clients to Merrill in order to increase their personal compensation.
On Monday, Merrill dismissed Spitzer's allegations and said it would defend itself vigorously. It has declined further comment.
Spitzer's inquiry is likely to send a collective chill down the spine of Wall Street analysts -- as no amount of critical press or even Congressional hearings have done.
The attorney general's office unveiled the Merrill e-mails and documents as part of its application for a court order under an anti-fraud statute; and it reproduced for public consumption the most damning of the e-mails and documents, along with excerpts from analyst deposition testimony, in a voluminous binder.
The attorney general's office said it had reviewed over 30,000 documents comprising 100,000 pages, including thousands of e-mails, and said that it had examined close to 20 witnesses under oath.
The office questioned the credibility of some of these witnesses, accusing them of having "displayed an implausible lack of recollection of key conversations and documents." On Monday, Spitzer refused to rule out the possibility of criminal sanctions.
"Analysts are going to be pretty scared," said David Geracioti, editor of Registered Rep magazine, which covers retail brokers. "The silly season has ended and now someone must pay."
04/10/02 14:30 ET |
