N.Y. Probe Of Analysts Subpoenas Four Firms
State Attorney General Broadens Investigation
By Robert O'Harrow Jr. and Caroline E. Mayer
Washington Post Staff Writers
Thursday, April 11, 2002; Page E01
NEW YORK, April 10 -- At least four more Wall Street investment banks were subpoenaed to produce documents in a state investigation of allegations that stock analysts promoted companies they didn't believe in so their firms could collect fees from the same firms, sources familiar with the investigation said today.
The subpoenas to Credit Suisse First Boston, Morgan Stanley Dean Witter, Bear Stearns, and Salomon Smith Barney in recent days are an escalation of the inquiry started last summer when New York state Attorney General Eliot Spitzer began examining the business practices at Merrill Lynch's group of Internet analysts.
The banks declined to comment today.
State investigators also are interested in activities at Lazard Freres, Goldman Sachs Group, Lehman Brothers Holdings and UBS PaineWebber, the sources said. Spokesmen for Goldman and Lehman Brothers said their companies had not been subpoenaed. UBS declined comment.
Spitzer said in court documents filed Monday that the Merrill Lynch investigation turned up thousands of documents and e-mails that support his contention that Merrill Lynch analysts -- purportedly independent researchers -- worked closely with investment-banking peers who market stocks.
Some of those e-mails, cited in an affidavit, show that Merrill Lynch star analyst Henry Blodget and his colleagues privately spoke with disdain about companies they urged investors to buy. A company given a top stock rating was described in one e-mail as "a piece of junk." Another well-rated stock "was called a piece of crap." One analyst wrote that "the whole idea that we are independent of [the] banking [division] is a big lie."
Investigators are sending more subpoenas to ensure that records are not lost or destroyed, sources said, and to avoid the appearance of targeting just one Wall Street firm.
Securities specialists said the disclosures about Merrill Lynch confirm the fears of many investors and could spur securities reform that has been discussed for years but made little headway. Spitzer has promised to publicly interrogate analysts from Merrill Lynch and the other banks in a series of hearings permitted by some of the toughest state securities laws in the nation.
"These hearings are going to be extraordinarily important," said Mark Sargent, dean of the Villanova University School of Law and a securities regulation specialist.
"If all of this is true, then the wall between investment banking and analyst functions has broken down, and you have a whole system afflicted by conflicts of interest," he said. That would amount to "a major breach of trust in the securities market."
Damon Silvers, associate general counsel of the AFL-CIO, which monitors corporate behavior for its union members' retirement funds, said the case has implications for investors everywhere. "We're deeply concerned," he said. "I don't think there's anything unique about Merrill Lynch."
Nell Minow, editor of the Corporate Library, an Internet corporate watchdog, called the ties between the analysts and investment-banking arms "the most corrupt process."
"It's like not knowing a restaurant critic is a partner in a restaurant," she said.
Merrill Lynch declined to comment. In a prepared statement Monday, the company objected to Spitzer's tactics and said "his conclusions are just plain wrong." They said that e-mail remarks cited in legal papers were "taken out of context."
Merrill Lynch officials are due in court on Thursday for a hearing on a state judge's ruling, in response to the affidavit, that Merrill Lynch must disclose the financial ties between its investment-banking business and the companies its stock analysts promote. The judge also ordered the bank to turn over more documents.
Today, the bank's legal team talked with Spitzer's office, sources said, trying to negotiate an extension of time for complying with that order.
In recent weeks, Spitzer had suggested that Merrill Lynch pay a $50 million fine, create a $100 million fund for investors who lost money because of analysts' advice and adopt other court-ordered reforms. But the bank balked.
One person familiar with the bank's situation said "they'd probably rather not have public hearings for two years, or whatever it's going to take, but they're not afraid of it."
Securities and Exchange Commission officials have expressed interest in the Spitzer investigation, and plan to meet with New York investigators, possibly as soon as next week, according to sources close to the case. SEC officials declined comment.
The New York Stock Exchange and National Association of Securities Dealers are seeking SEC approval of self-regulation that would require much of what Spitzer seeks.
The proposed NASD rules, for instance, would prohibit links between analyst compensation and investment banking deals. "We're quite anxious to see these rules in place," said Mary Schapiro, president of NASD Regulation.
Jacob Zamansky, a New York lawyer who represented an investor who settled a similar case with Merrill Lynch last year for $400,000, called Spitzer's actions "very courageous." He said it shows that a regulator will hold firms "accountable for misleading recommendations."
Zamansky represented a 47-year-old pediatrician who said he lost $500,000 after he invested in the Internet company InfoSpace in 2000, based on the recommendation of his Merrill Lynch broker. The investor bought shares for between $122 and $135, and tried to sell when the stock fell to $60 a share a few months later, the lawyer said. "His broker said, 'No, stay in it because [Henry] Blodget will issue a research report and the stock will go up based on that.' "
Blodget issued his report in July, but the stock continued to fall and the investor sold in December for $11 a share -- days after Blodget downgraded his recommendation. Zamansky said Blodget's July report failed to disclose that Merrill Lynch had been hired by InfoSpace to advise on a deal in which Merrill Lynch stood to gain $17 million.
The lawyer said he gave the Merrill Lynch documents he used in the case to Spitzer's office last summer.
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