Spitzer's in Probe Driver's Seat
By Ann Woolner
Atlanta, May 3 (Bloomberg) -- All sorts of folks are showing up for New York Attorney General Eliot Spitzer's bandwagon. Still, even as his investigation into brokerage houses picks up passengers, not everyone's jumping on.
U.S. Representative Richard Baker has boldly leaped in front of the oncoming vehicle. The Louisiana Republican, chairman of the House subcommittee on capital markets, is waving his arms to divert the wagon to a side road.
Baker says a state attorney general has no business demanding that major brokerage houses change their cheatin' ways. Setting and enforcing industry standards is the job of Congress and the U.S. Securities and Exchange Commission, Baker wrote to SEC Chairman Harvey Pitt this week.
He's right. It is their job. The problem is, they haven't been doing it.
The other problem for Baker is that it is Spitzer's job to enforce New York securities law, and he's actually doing it.
Baker held congressional hearings, all right. But it was Spitzer who found evidence that Merrill Lynch, the nation's largest brokerage house, was using supposedly objective research reports as marketing tools to entice and keep investment banking clients.
It was Spitzer's office, not Baker's, that sifted through 100,000 pages of subpoenaed Merrill Lynch policies, documents and e-mail messages and found that Merrill's Internet research analysts were applying prodigious coats of rosy paint to companies whose banking business they wanted to get or keep.
`Junk' and `Toast'
For InfoSpace, they slapped on their highest ``buy'' rating and kept it there, even as the stock price plummeted from $261 to $13.69 and analysts privately called the stock ``junk'' and ``toast,'' according to an affidavit filed by Spitzer's office.
For GoTo.com, analysts accelerated their estimate on when the company would turn a profit and downgraded a competitor's rating, the affidavit says.
The ``whole idea that we are independent from banking is a big lie,'' one analyst's internal e-mail message said.
If we waited for Baker or for the SEC to uncover any of this, to punish wrongdoers, to compensate victims, to figure a way to prevent future abuses, we'd be waiting a very long time.
Only now, since Spitzer supplied the fuel, is the SEC gearing up to investigate. Likewise, California and New Jersey have signed on to Spitzer's inquiry, with the three states leading a new, multistate task force of the North American Securities Administrators Association.
Martin Act
The fact is, Spitzer has broad authority under New York's Martin Act, which outlaws securities fraud in New York and which predates by 12 years the 1933 federal Securities and Exchange Act.
The New York law allows the state attorney general to investigate, bring criminal prosecutions and seek civil penalties. It lets him seek restitution for victims. It even allows him to persuade a judge that a brokerage firm should be stopped from all future trading.
The power of the Martin Act has brought Merrill to the bargaining table and is doubtless sending shivers through the other 10 brokerage houses whose records Spitzer's office has subpoenaed. The fact that Merrill's stock value has dropped by as much as $9.8 billion since Spitzer announced his findings is enough to chill any brokerage.
With Spitzer holding the Martin Act in one hand and the Merrill documents in the other, the brokerage has promised to state on the front page of every research report whether the company is a Merrill client and how much it paid the brokerage over the previous 12 months.
`Structural Flaws'
Reports will advise investors to assume the brokerage ``is seeking or will seek investment banking and other business from the covered company.''
Merrill and Spitzer's office are negotiating a possible restitution fund, civil penalties and what Spitzer has called a correction of ``fundamental structural flaws'' in Merrill's business.
Merrill is a passive minority investor in Bloomberg LP, parent of Bloomberg News.
Whatever reforms result at Merrill or any other firm investigated by Spitzer, the attorney general lacks the authority to impose changes industrywide.
Nonetheless, Baker complains that Spitzer's office is reaching far beyond its law enforcement job to meddle with national policy. The office's ``unprecedented efforts to propose and impose its own rules on the marketplace'' are threatening the necessary ``uniformity in our national securities market,'' Baker wrote to Pitt.
New Rules
Baker urged the SEC to get ahead of Spitzer's bandwagon by approving new rules, supported by his subcommittee, for the National Association of Securities Dealers and the New York Stock Exchange.
Baker would have a point if it weren't for the evidence Spitzer uncovered, the fact he was the one who uncovered it, and the power of New York's law.
Ideally, a state attorney general would not be the one who decides that a brokerage firm should disclose its conflicts of interest to the public.
And while Baker's proposed new rules represent ``a good, baby first step,'' in the words of investor plaintiffs' lawyer Jacob Zamansky, they don't go far enough. Spitzer has asked Congress to go further and prohibit analysts' pay from being linked to their firms' investment banking business.
As Spitzer notes, Baker's ``proposed structural changes were already largely in effect at Merrill Lynch, while Merrill's analysts were issuing manipulated ratings.''
Spitzer's not about to turn away now. Unless Baker steps out of the way or catches up, he might be run over.
bloomberg.com |
