Spitzer Targeting 9 More Wall St. Firms
Eyes touts of ailing stock
By WILLIAM SHERMAN
Daily News Staff Writer
he state probe into bogus stock touting and conflict-of-interest charges involving analysts has expanded to nine more major Wall Street brokerage firms in addition to Merrill Lynch.
"Ten firms have received subpoenas, and there's no reason to believe that the problem is limited to Merrill Lynch," said state Attorney General Eliot Spitzer, alleging that investors were routinely fleeced through sham stock-buy recommendations.
Millions of dollars in fees, including new stock underwriting commissions, from the very companies endorsed by the analysts were at stake for the brokerage houses in some cases, say investigators.
Brokerage firms where analysts give companies poor ratings and urge investors to sell risk losing that lucrative underwriting business and profits from other deals, including mergers, according to industry sources.
Analysts work for the research departments in the big, full-service firms. The big fees come from their investment banking departments.
The analysts are supposed to provide objective research on stocks to the public and remain independent from the investment banking groups.
"Nobody disputes that the barrier between research and investment exists, but the wall is so porous it might as well not be there," Spitzer said.
"The tensions between investment banking and research exist any time there's an underwriting and then an analyst's report on the same stock," he said.
Top Firm Denies Charge
A spokeswoman for Merrill Lynch denied that research and recommendations are influenced by investment banking concerns.
"Merrill has always had an independent reporting structure and research has never reported to investment banking, sales trading or any other division of the firm," said spokeswoman Susan McCabe.
Meanwhile, investors who blindly followed many of Merrill Lynch and other firms' buy recommendations during the past four years, particularly in the hot Internet and telecommunications sectors, lost fortunes as the stocks plummeted.
Spitzer declined to name the other nine firms subpoenaed, but other sources have confirmed they include Salomon Smith Barney and Morgan Stanley.
Defending a Star
Morgan Stanley said in a federal filing that it received a subpoena and is cooperating.
Salomon declined to comment specifically on the subpoena.
A company spokesman did defend the record of highly influential telecom analyst Jack Grubman, under investigation for his aggressive buy recommendations on companies such as Worldcom that had paid Salomon millions of dollars in underwriting fees.
"Jack Grubman never operated as an employee of the investment banking group and his compensation has never been linked to investment banking," said Salomon spokeswoman Susan Thompson.
"The stocks like Worldcom that he recommended always carried a high risk rating with the recommendation."
Grubman maintained a buy rating on the faltering concern even through its steady fall from Jan. 2, when it was trading at $10.50, through April 11, when it closed at $4.77.
On April 22, Grubman lowered his Worldcom rating to "neutral" when the stock price was $4.01, but he never recommended selling it.
It was the first time in four years Grubman had lowered Worldcom's rating from a buy. During that time, Worldcom stock has fallen more than 95%.
On Friday, it closed at $1.79.
Merrill Lynch has been rocked by a series of incendiary in-house e-mail comments on various stocks, disclosed in Spitzer's affidavit outlining the firm's alleged conflicts.
Privately, the analysts panned several of the stocks in often crude terms.
"Junk" and "fundamentals horrible" were among the more polite terms used. Publicly, the analysts and Merrill Lynch maintained buy recommendations on those very same stocks.
The analysts included former Merrill Lynch star Henry Blodget, who reportedly earned $12 million last year at the firm and was known as the Pied Piper of the Internet.
Practices Lambasted
Spitzer was highly critical of Merrill Lynch's practices.
"There's nothing illegal or criminal in giving wrong advice, that's the nature of the marketplace, but if advice is given that's not even believed by the company that gives it, and it's given because of a conflict of interest, a pall is cast over the marketplace," Spitzer said.
Merrill Lynch spokeswoman McCabe responded, "The e-mails represent snippets of conversations and not the end conclusions.
"Merrill stands behind the recommendations that were made."
However, investigators say the conflict between the research and investment sides of the firm are obvious in Merrill Lynch's internal communications.
One Merrill Lynch senior manager stated in a memo, "We are off base in how we rate stocks and how much we bend over backwards to accommodate banking."
And a senior Merrill Lynch analyst wrote, "The whole idea that we are independent of [the] banking [division] is a big lie."
Additionally, Merrill Lynch CEO David Komansky delivered a public apology last week. "The [internal] rules were not strong enough or were not enforced well enough or something went wrong," he said. "Those e-mails were embarrassing to me. They were embarrassing to read. And I truly regret that they ever happened."
Consequences Building
The fallout from Spitzer's probe has been enormous:
Investor confidence in brokerage houses has been badly damaged.
The Securities and Exchange Commission and the Manhattan U.S. attorney's office are also investigating.
The firms are facing class-action investor suits that could cost them several billion dollars, according to independent Wall Street analysts. Individual investors have also filed suit against several firms and the analysts themselves.
Merrill Lynch stock has lost nearly $10 billion in market value since the Spitzer subpoena was issued April 8, and the company is now negotiating a civil settlement that could total more than $100 million.
It has agreed to change its rating system, and to disclose its investment banking relationship, if any, with companies recommended by analysts.
nydailynews.com |
