.FEATURE-State regulators forge ahead on Wall St probes
By Per Jebsen
NEW YORK, Aug 29 (Reuters) - Regulators from more than 40 states are sifting through mounds of Wall Street's e-mails, employee evaluations and other internal documents, dissecting the role of stock analysts in the technology and telecom bubble.
They are hoping that the documents will provide a window into the analysts' activities, and whether financial companies routinely used favorable stock recommendations to win lucrative investment banking business.
While loath to tip their hand, many regulators suggest action against Wall Street firms will materialize in the near future. The measures would resemble the New York attorney general's probe into and settlement with Merrill Lynch & Co. <MER.N> this spring.
In fact, some regulators say they favor similar public releases of potentially embarrassing material to enable class-action lawyers to seek redress on behalf of injured investors. They have plenty of material to work from.
"We're still looking at thousands and thousands of (pages of) documents," said Joe Borg, president of the North American Securities Administrators Association (NASAA) and Alabama's director of securities. "I might get 30,000 (pages of) documents one week ... we could be seeing literally millions of pages."
Most of the about 44 states involved in the Wall Street inquiry have formed into teams that each focus on a top investment bank.
Bear Stearns Cos. <BSC.N>, for instance, is being probed by New Jersey with support from Delaware, Hawaii, Maine, Pennsylvania and Vermont, according to Ryan Ushijima, Hawaii's commissioner of securities. Lehman Brothers <LEH.N> is being investigated by Alabama, with the assistance of Georgia, Indiana and Mississippi, said Alabama's Borg.
A steering committee of a dozen or so states, chaired by California, New Jersey and New York, is overseeing the probe. The states are traveling unfamiliar terrain in examining the inner workings of global powerhouses like Goldman Sachs <GS.N> and Morgan Stanley <MWD.N>, rather than their more traditional fare of broker boiler rooms and penny-stock fraud.
Yet regulators dismiss the suggestion they are trying to beat the Securities and Exchange Commission to the punch -- or that they want to impose industry rules apart from the Commission.
The SEC, along with the National Association of Securities Dealers and New York Stock Exchange, are Wall Street's traditional watchdogs. They were upstaged by New York's Merrill inquiry, and have launched their own inquiries into analysts' conflicts-of-interest. So too have federal prosecutors.
"I really wouldn't classify what we're doing as some kind of race against the other regulators," said Tanya Solov, Illinois' director of Illinois' securities department.
Rather, the states are holding regular teleconferences with the SEC, NASD and NYSE and, in any case, the inquiries may differ somewhat, Borg said.
"We're not on the same page but we're in the same book," he said.
New York's probe into Merrill, which led to the multi-state coalition now investigating Wall Street, drew sharp criticism from those members of Congress who had championed analyst reform. New York's inquiry intruded on the federal domain, they charged.
The state regulators are politically ambitious and lack the expertise to investigate or devise a durable solution for analysts' conflicts, said Jon Macey, a law professor at Cornell University. The SEC under Harvey Pitt is better suited to the task, he said.
Nonetheless, opposition to the states' role has faded somewhat. An attempt by Morgan Stanley's chief executive to reduce the states' investigative authority fizzled. Most states, moreover, have signed off on the Merrill settlement, or said they will.
New York is most likely among the states to be next to act because the Merrill inquiry gave it a 10-month head start, regulators say. New York has at its disposal a powerful legal tool, the Martin Act, that makes it easier than it would be under federal law to bring securities fraud cases.
Last Friday, AT&T Corp. <T.N> said it had received a subpoena from the New York attorney general's office related to its probe of Citigroup's <C.N> Salomon Smith Barney equity research division.
YEAR-LONG PROBE
The overall Wall Street probe may last a year or so, Alabama's Borg said. The states feel an obligation to quickly wrap up their inquiries to restore confidence in the markets, he said.
The regulators hedge on potential remedies. The Merrill settlement would serve as a road map, but each case may require its own particular solution, they say.
Some regulators favor airing investment banks' dirty document laundry to provide class-action lawyers with the evidence they need to make cases.
"The private bar is extremely important to the process," especially given the difficulty of establishing "causation" -- the degree to which investors relied on research advice, said Ralph Lambiase, Connecticut's director of securities.
Ultimately, firmer internal supervision may prove necessary, regulators say.
"The compliance department did not always have control and authority over the top producers and top analysts," a regulator said. "Right now compliance doesn't seem to have the proper stick ... they don't have the authority over them that they should."
Wall Street firms or analysts hoping for a break since everyone did it may be in for an unpleasant shock.
"Just because there has been a widespread policy or practice amongst the firms, that doesn't make the practice a correct one or a proper one," Illinois' Solov said.
(Per Jebsen, Wall Street Desk, (646) 223-6152))
08/29/02 14:17 ET |
