E-mail exchange suggests analyst conflicts at CSFB
By Per Jebsen
NEW YORK, Sept 12 (Reuters) -- Credit Suisse First Boston <CSGZn.VX> may have a $100 million analyst e-mail problem -- much like Merrill Lynch & Co. <MER.N> earlier this year.
An exchange of CSFB e-mails indicates that CSFB analysts may routinely have received compensation that was linked to specific investment banking transactions. The e-mail exchange, which was provided by sources close to securities regulators, also suggests that a CSFB analyst may have publicly recommended a company whose prospects he privately doubted.
Indeed, the e-mails contain language -- such as a reference to a stock as a "piece of crap" -- that is reminiscent of the now-famous Merrill e-mails unveiled in April by New York State Attorney General Eliot Spitzer.
"(The CSFB e-mails are) one more piece of evidence that the concerns that have moved the SEC and people on Capitol Hill to act are very serious, and not aberrations," said Donald Langevoort, professor of securities law at Georgetown University in Washington.
"There may be very good explanations on the company's side, (but) the more of this we see, the more pressure comes on Wall Street to engage in very serious reform," he said.
The Merrill e-mails, in which the firm's Internet analysts trashed stocks to which they had given top recommendations, led Merrill to agree to pay a $100 million fine and adopt various reforms intended to reduce analysts' conflicts of interest.
"Early on, we welcomed, fully endorsed, and have been implementing the Spitzer initiative to make systemic changes to strengthen analyst independence," said Victoria Harmon, a CSFB spokeswoman.
"We are now working closely with regulators and government officials on these matters," she said.
'PIECE OF CRAP'
In the CSFB e-mails, Elliot Rogers, who held a supervisory position in CSFB's research department, asks an analyst whether he was "paid for helping it out" on the August, 2000 initial public offering by Lantronix Inc. <LTRX.O>, a networking technology supplier. The IPO had been managed by investment bank Donaldson, Lufkin & Jenrette, which CSFB acquired in fall 2000.
Rogers states that if the analyst, Kevin McCarthy, was paid, he might "have a moral obligation to maintain some form of backburner coverage." Rogers states that if McCarthy's "IBD (investment banking division) comp did not reflect this puppy, I will support you in pushing back on coverage."
McCarthy replies that he "agreed to do the deal" because DLJ had no networking analyst and that he "would do stuff beyond the call of duty."
"I put my reputation on line to sell this piece of crap calling favors from very important clients," McCarthy states in the e-mail exchange.
"This deal was an embarrassment to me and the firm and I wasted a lot of bullets to get it done," he says.
At CSFB, McCarthy dropped coverage of Lantronix.
BREACH OF DUTY
Wall Street analysts have come under tough criticism and, more recently, probes by securities regulators for hyping stocks that later tanked when the Internet and telecom bubble burst.
The Securities and Exchange Commission has implemented a variety of restrictions on analysts' conduct. Following the investigation into Merrill by New York, both federal and state securities regulators have embarked upon a sweeping examination of whether analysts misled investors in order to boost their employers' profits from underwriting and advisory work.
William F. Galvin, top securities regulator for Massachusetts, which is investigating CSFB on behalf of the multi-state coalition probing Wall Street analysts, said his investigation has uncovered "very troubling" material.
"They suggest to us a pattern of breach of fiduciary duty," Galvin said. "It appears at least in some cases that (analysts) treated investors like suckers, and apparently the motive was simply more profit for the company with a reckless disregard for the rights of the investors."
"We're pulling the curtain back on Wall Street," he said.
Massachusetts securities regulators have the power to apply a variety of sanctions where a firm has broken the law, including referrals for possible criminal conduct to either the Massachusetts state attorney general or the U.S. attorney's office, Galvin said. Massachusetts regulators also have the ability to revoke a firm's license to do business in the state, and the state has frequently returned money to injured investors, he said.
"There's been a history (in the securities industry) of companies paying lip service to regulators ... paying a fine (and) immediately finding a new way to do it again," Galvin said.
"Our goal is to improve and reform the industry, not only to protect the rights of our investors (but also because we) are very concerned with the overall health of the market ... and the economy in general," he said.
09/12/02 15:59 ET |
