S.E.C. Begins Investigation Into Analysts
April 26, 2002
By PATRICK McGEEHAN
T he Securities and Exchange
Commission, the chief
regulator of financial markets,
announced yesterday that it had
begun a formal investigation into
Wall Street stock analysts and
their potential conflicts of
interest.
One day after meeting with Eliot
L. Spitzer, the New York attorney
general, Harvey L. Pitt, the S.E.C.
chairman, said the commission
would join forces with Mr. Spitzer
and other state and federal
securities regulators in a "formal
inquiry."
The commission does not usually
announce its investigations but
Mr. Spitzer has received a lot of
attention in the last three weeks
for his investigation of whether
analysts at Merrill Lynch and
Citigroup recommended stocks to
help their employers' obtain or
keep investment banking
business.
Mr. Pitt's announcement signals that other firms on Wall
Street will not be left out and that the regulators will seek
to propose solutions that will affect all securities firms.
Shares of several major securities firms dropped sharply
after the announcement.
"This is a significant step," said Lewis D. Lowenfels, an
authority on securities law at Tolins & Lowenfels in New
York. "A federal agency is exercising its jurisdiction to
take control of an investigation that has national
implications from a policy standpoint."
Since last year, regulators at the commission and the
National Association of Securities Dealers have been
looking into analysts' practices. But turning the effort into
a formal investigation gives the commission the power to
compel testimony and to issue subpoenas to investment
banks for any relevant documents.
Mr. Spitzer's investigation, begun last summer, took on a
new life after his office gathered e-mail messages written
by Merrill analysts that appeared to show that their
private opinions of some stocks differed markedly from
their public statements. In those messages analysts,
including Henry Blodget, a former star analyst at Merrill,
called companies they were recommending junk and
worse.
Talking to reporters after giving a speech in New York
yesterday, Mr. Pitt said that it would be irresponsible of
the commission to ignore the issues that had been raised
in the investigations by Mr. Spitzer and others. He also
indicated that the commission wanted to take control of
the policing of an issue that many on Wall Street think
should be left to federal regulators, not sorted out state by
state.
In a statement, Mr. Pitt said, "We will give investors
confidence that the same securities rules and protections
apply no matter where they live or do business."
Mr. Pitt said the S.E.C. would coordinate its inquiry with
state securities regulators, the New York Stock Exchange
and the N.A.S.D. On Wednesday, the North American
Securities Administrators Association said that it had
formed a multistate panel to study analysts' practices.
Mr. Spitzer said in an interview yesterday that he
welcomed the involvement of the federal regulators but
that he would proceed with his investigation.
"I have always believed that the best way to resolve this
was to have the regulatory agencies working together," Mr.
Spitzer said. "We framed the issue. Now, we need to solve
it."
He declined to discuss what he and Mr. Pitt talked about
when they met in Washington on Wednesday. But he said
he intended to continue trying to reach a settlement with
Merrill Lynch.
Mr. Spitzer has been demanding that Merrill Lynch pay a
large fine and create a restitution fund for investors who
bought stocks on the recommendations of the firm's
analysts. He has asked the firm for $100 million or more,
according to people close to the negotiations.
Merrill has balked at paying that much and, especially, at
admitting any wrongdoing, which could weaken the firm's
defenses against lawsuits by investors, these people said.
Last fall, Merrill agreed to pay $400,000 to settle a
complaint a customer brought against the firm and Mr.
Blodget.
Mr. Spitzer has also asked Merrill to make structural
changes to increase the insulation of its analysts from the
firm's investment bankers and their corporate
relationships. Merrill officials proposed setting up a board
for its research department, with the majority of them
coming from outside the firm and reporting directly to the
firm's senior executives.
But Merrill is reluctant to agree to significant changes
that might handicap it in competing with other firms that
have not made such changes, people close to the firm
said. Even Mr. Spitzer has acknowledged that Merrill has
done more to insulate analysts from bankers than some of
its major competitors.
"It may be that what we want Merrill to do is more
substantial than what others are thinking of," Mr. Spitzer
said.
Merrill's stock fell another 4.8 percent yesterday, to
$42.50, and is now down 21 percent since Mr. Spitzer
released the e-mail messages on April 8.
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