States Pressing Analyst Probe
Securities Firms Fear Patchwork of Rules, Back SEC Investigation
By Kathleen Day
Washington Post Staff Writer
Wednesday, May 1, 2002; Page E01
State regulators are moving ahead with a coordinated investigation of conflicts of interest among stock analysts on Wall Street, sources said yesterday, to the dismay of the securities industry, which is backing a Securities and Exchange Commission-led probe of the issue.
Officials from at least five states -- New Jersey, Connecticut, California, Alabama and Massachusetts -- spent a day last week with representatives of the office of New York Attorney General Eliot Spitzer to study his work on Merrill Lynch & Co., the sources said.
Spitzer disclosed internal e-mails three weeks ago showing that Merrill Internet analysts privately derided stocks they rated as "buys" at the same time Merrill investment bankers were earning fees from the same companies.
The state officials agreed to let New York continue to take the lead in issuing subpoenas to gather information from major Wall Street firms. New York will share that information with other states, sources said, in part to streamline the process and to avoid criticism from the securities industry that it is being buried by requests from many states.
When SEC Chairman Harvey L. Pitt announced late last week that the federal agency was opening a formal inquiry into the analyst issue, he acknowledged Spitzer's role but said the states' effort "will be part of the SEC inquiry."
Sources say some state regulators were miffed at that wording. While the states will work with SEC, the regulators said, they intend to pursue their own investigations independently.
Many in the securities industry are also upset, but by the Spitzer probe and what they see as the SEC's slowness to react to it, sources said. Top officials of the industry's trade association discussed their concerns about New York's actions with Pitt last Wednesday, the day before his announcement.
At the meeting, Pitt told Marc E. Lackritz, president of the Securities Industry Association, and three other officials that the SEC would launch its own analyst investigation, the sources said. Brokers fear multiple state actions because they would force Wall Street brokerages to fight legal battles on many fronts. That would be far more expensive than negotiating with the single federal agency.
Lackritz yesterday issued a statement confirming the meeting with Pitt, but he declined to provide details.
The SEC also declined to comment on the meeting. But a source familiar with the agency's position said the SEC launched its investigation in part because it already was involved in a review of the rules governing stock analysts, but also out of its own concern that states such as New York "might seek to impose structural changes to the industry as part of a settlement."
That could result in varying securities rules across the country, which would make it hard for national firms to function, the source said.
Pitt, in an interview yesterday evening, said the SEC launched its probe to ensure that proposed changes to analysts rules now being considered are adequate and so that "if anyone has violated current law they be held accountable."
Pitt, a former securities lawyer who represented Merrill Lynch, among other firms, has been accused by consumer groups and some lawmakers of being too close to the industry.
Last Thursday, after the SEC announced its probe, Lackritz issued a statement praising the SEC action, saying it is important to have uniform securities rules rather than a patchwork of state regulations. Wall Street executives say they believe the SEC's effort will be largely aimed at writing new rules rather than seeking legal punishment for past misdeeds.
The industry officials said they fear that the states will take a more aggressive tack.
State officials who are part of a 12-state task force set up last week by the North American Securities Administrators Association will focus on identifying acts of fraud and seeking punishment, according to sources.
Until now, most state probes have looked at individual brokers and firms' oversight of those brokers. For example, last year Merrill paid a $750,000 fine to Massachusetts and $7 million in mediated settlements to investors who complained about how a Merrill broker had handled their accounts.
Meanwhile yesterday, Spitzer and Merrill officials continued talks about a possible settlement that would avoid charges being filed against the firm. They are trying to schedule a meeting for this week that would include Spitzer and Merrill's top two officials, chief executive David H. Komansky and President E. Stanley O'Neal.
The two sides remain at odds on significant issues, sources on both sides agreed. Spitzer, who has already won an agreement from Merrill to disclose more about its investment banking ties to companies that its analysts rate, wants the firm to admit wrongdoing, pay a substantial fine and make further structural changes to separate investment bankers from analysts.
But a source familiar with Merrill's position said the firm remains unlikely to admit wrongdoing, both because it believes the e-mails released by Spitzer were taken out of context and because any such admission could leave the firm more open to shareholder lawsuits. The source also said the firm will continue to oppose any structural change that would diminish its ability to compete with other banks. |
