CSFB fought change, e-mails show
Investment firm resisted guidelines for analysts
Christian Berthelsen, Chronicle Staff Writer
Tuesday, September 17, 2002
©2002 San Francisco Chronicle.
URL: sfgate.com
Despite public pledges to adopt reforms recommended by an industry trade group, Credit Suisse First Boston fought last year to avoid new
conflict-of- interest rules for stock analysts, privately boasting that they would make only cosmetic changes in policy, according to internal
company e-mails.
The new standards, promoted by the Securities Industry Association, specifically prohibited analysts' pay from being linked to investment
banking deals.
The e-mails, which were obtained by The Chronicle, make clear that Credit Suisse analysts were pressured by the firm's bankers, as well as by
executives at the companies they covered, to issue only positive comments.
One analyst, Kevin McCarthy, complained in an e-mail about having to "put my reputation on the line to sell this piece of crap."
Another e-mail raised questions about the quality of companies taken public by CSFB during the technology stock boom. In it, San Francisco
software analyst George Gilbert said that a colleague, New York networking analyst Mark Wolfenberger, told clients "most of his IPOs never
should have gone public" but that "we all got our bonuses for a good year."
The e-mails show that senior executives based in Palo Alto, including Frank Quattrone, the head of technology banking, and Elliott Rogers, the
deputy head of global technology research, were vehemently opposed to any changes.
The firm's New York executives, concerned about the public fallout if they failed to go along with the "best practices" recommended by the
SIA, ultimately agreed to adopt them.
The e-mails are part of a wide-ranging investigation into Wall Street research practices after the implosion of the dot-com economy.
Investment banks are under heavy scrutiny for allegedly enlisting analysts to tout the stocks of companies with which their firms were doing
investment banking business. Merrill Lynch agreed in May to pay a $100 million fine to settle the investigation into its own research practices.
In January, Credit Suisse paid $100 million to settle a Securities and Exchange Commission investigation into a different issue: allegations that
the firm was demanding kickbacks from customers who were awarded hot IPO allocations.
But now its research practices are bring investigated by Massachusetts' secretary of state, the state's top market regulator. Its IPO allocation
practices are also under investigation by a congressional committee over whether hot IPO stocks were given to executives in exchange for
investment banking business.
"We're troubled by some of the things we've found and will continue our investigation," said William Galvin, Massachusetts' secretary of state.
Asked for comment about the investigation, CSFB said only that it is "working closely with the regulators and government officials on these
matters. "
On the subject of its research practices, CSFB said it had fully adopted the SIA guidelines and even exceeded them, by adopting
recommendations made by New York Attorney General Eliot Spitzer. Further, a spokeswoman for the firm said pay for technology analysts
was never linked directly to individual deals.
Analysts are compensated from a general pool of investment banking revenue.
In the end, however, the debate over whether to adopt the standards proved academic, because SEC rules that took effect in July bar bankers
from supervising analysts or linking their pay directly to banking deals.
But the e-mails do reveal just how tenaciously CSFB's bankers sought to cling to the control they had under the old system.
For instance, Rogers, in a memo to Brady Dougan, CSFB'S global head of equities in New York, cast doubt on the impact of the new
standards on his unit's operations. "Technology Research compensation will continue to be derived from a pool generated within the
Technology Group," he said. "Analyst participation in the group 'point' award system will not change, unless points are found to be legally
indefensible."
Quattrone, in one e-mail, said there was no need to be concerned about the new standards because they concerned "appearance and structure
rather than substance."
In another e-mail, Rogers said the new reporting structure would have no real impact, likening it to "giving up turpentine for Lent." In still
another message, he said the new system "does not change our compensation one iota, nor our bonus pool. To assume that the SIA statement
is going to upset our apple cart is incorrect."
A lengthy memo by Erach Desai, a former Boston technology analyst for the company, laid out several instances in which he felt CSFB had
imposed rules "to keep our corporate clients appeased."
Rule No. 1, he said, was: "If you can't say something positive, don't say anything at all." Another was: "Go with the flow of other analysts,
rather than being contrarian."
In response to his cautionary comments about one company, Parametric, Desai said he was told "the senior (CSFB) folks in Palo Alto do not
believe that you understand how to be banking-friendly."
E-mail Christian Berthelsen at cberthelsen@sfchronicle.com. |
