Analysts Accused Of Touting Tech 'Junk' To Boost Profits
By Robert O'Harrow Jr, Washington Post
NEW YORK, NEW YORK, U.S.A.,
09 Apr 2002, 8:58 AM CST
A trove of internal e-mail from one of Wall Street's biggest investment banks shows that analysts promoted struggling technology companies they didn't believe in while the bank earned fees selling the firms' stock, the state's attorney general alleged today.
At the height of the technology bubble, Henry Blodget and other Internet analysts at Merrill Lynch & Co. issued glowing reports about companies that would later crash, while privately deriding the stocks to one another in salty, dismissive language.
One company given a top rating by analysts was described in-house as "a piece of junk." Another was called "such a piece of crap," even though analysts in Merrill's Internet group told investors to buy more of it for their portfolios. One analyst worried that regular investors "are losing their retirement" because of the misleading advice.
The documents, filed in court after a 10-month investigation, provides ammunition to critics who question whether the so-called "Chinese Wall" separating analysts, who are supposed to provide independent advice, and investment bankers, who generate fees by bringing stocks to the market, actually exists, as Wall Street claims.
"As dramatic and damning as this evidence is against Merrill Lynch, it may be the tip of the iceberg," Attorney General Eliot Spitzer said at a news conference.
"This is one of the most explosive documents I have seen," John Coffee Jr., a corporate law professor at Columbia University, said in an interview. "The industry is admitting they are totally conflicted."
In response to the allegations, a state judge ordered Merrill officials to disclose the financial ties between its investment bank and the companies its stock analysts promoted, with a court hearing to follow next month. The judge later delayed implementation of the order for three days, in part to give Merrill officials time to respond.
Merrill officials vehemently objected to the charges Spitzer's office outlined in a 37-page affidavit, saying in a statement that "his conclusions are just plain wrong" and that the e-mail remarks cited in legal papers were "taken out of context."
Bank spokesman James Wiggins said the e-mail showed the process of deliberation among analysts, not fraudulent or misleading activity. "There's a lot of debate and discussions behind the scenes that goes into rating a stock. And that's what these e-mails reflect," he said.
Spitzer said in an interview after the news conference that there is no doubt about the meaning of the e-mail discussions he obtained through subpoenas in recent months — or the impact on an unsuspecting investing public.
"The e-mails are an important window into what the analysts and investment bankers were thinking," he said. "What these e-mails demonstrate is the desire to satisfy investment banking clients overrode the obligation to provide honest analysis. … That's not a pretty story."
Congress is already examining the role that analysts played in promoting Enron Corp. as a solid investment while earning large fees for underwriting its stock and debt offerings. Stockholders who lost billions of dollars when Enron collapsed just amended a lawsuit charging Merrill and several other investment banks with directly helping the Houston energy trader defraud investors.
While Spitzer's investigation includes other investment banks, the affidavit concentrated on the ties between Merrill's chief Internet analyst, Blodget, who left the firm last year, and its investment bankers. In the fall of 2000, Merrill analysts were asked in correspondence where their work helped the banking side get business.
In response, Blodget and his group said that they had been involved in 52 completed or pending investment banking transactions, with the completed deals worth $115 million to the company. A short time later, the affidavit said, Blodget's annual compensation package was increased from $3 million for 1999 to $12 million for 2001.
Merrill agreed last year to pay $400,000 to a client who claimed Blodget's rosy reports led him to lose millions.
Staff writer Carrie Johnson and researcher Richard Drezen contributed to this report.
Reported by Washingtonpost.com, washingtonpost.com |
