Expanded NY Probe Spooks Analysts
By Per Jebsen
NEW YORK (Reuters) - Wall Street analysts can't be blamed for getting antsy 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. (NYSE:MER - news) after an investigation showed the Wall Street firm's analysts boosted stocks in public but disparaged them in private, according to internal e-mails.
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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, who did not name the others.
Spokeswomen for Credit Suisse First Boston (CSGZn.VX) and Morgan Stanley (NYSE:MWD - news), which reportedly 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 refused to rule out the possibility of criminal sanctions -- a harrowing prospect for financial firms. Criminal charges often prove devastating for a business that's based on trust, as the exodus of clients from beleaguered accounting firm Andersen shows.
OLD E-MAILS
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 New York state appears to dramatically confirm 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. (NasdaqNM:AETH - news), InfoSpace Inc. (NasdaqNM:INSP - news) and 24/7 Real Media Inc. (NasdaqNM:TFSM - news), 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 release the most damning of the e-mails and documents, along with excerpts from analyst deposition testimony, in a voluminous binder.
The office said it had reviewed more than 30,000 documents comprising 100,000 pages, including thousands of e-mails, and said that it had examined close to 20 witnesses under oath.
'SOMEONE MUST PAY'
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.''
``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.''
While the investigation may put the fear of God into analysts about issuing misleading opinions, the impact of Eliot's investigation on how Wall Street firms otherwise run their research business is less clear.
The order Spitzer obtained on Monday from New York Supreme Court Justice Martin Schoenfeld would require Merrill to disclose past and prospective investment banking relationships with the company discussed in a research report. It would also require Merrill to provide a percentage breakdown of ratings used in the company's industry group.
Similar disclosures, however, are already in the works. In February, regulators unveiled proposed new rules requiring disclosure of banking relationships and ratings breakdowns. These rules -- backed by the U.S. Securities and Exchange Commission, key national politicians, the National Association of Securities Dealers and the New York Stock Exchange -- are likely to be implemented this spring. They have also been endorsed, with caveats, by the securities industry.
``Spitzer is coming into the dialogue late in the game,'' said Nina McKenna, a securities lawyer in Kansas City, Missouri with law firm Sonnenschein Nath & Rosenthal and former regional chief counsel for the NASD's regulatory unit. ``This poses additional challenges for firms that are in the process of revamping procedures to conform with the proposed rules.'' |
