The breadth of the alleged corruption on Wall Street during the late 90s tech boom was revealed yesterday when an historic $1,4-billion settlement of conflict of interest allegations was finally published.
The deal, agreed in principle at the end of last year, settles claims that analysts published research which was presented as objective but was actually a sop to win investment banking fees for their firms.
Two analysts – Henry Blodget, formerly of Merrill Lynch, and Jack Grubman, once with Salomon Smith Barney – received individual fines, $4-million and $15-million respectively, and were barred from the industry.
Investigations into individuals are still continuing and other senior executives could be implicated.
The settlement with Citigroup, the parent of Salomon, details an episode in November 1999 when chief executive Sanford Weill asked Grubman to take a ”fresh look” at AT&T, where Weill served as a director.
The complaint alleges that Grubman later admitted privately that he upgraded AT&T in return for Weill’s help in getting his children into an exclusive nursery.
The harshest criticism was directed at Credit Suisse First Boston, Merrill Lynch and Salomon Smith Barney, which were alleged to have issued ”fraudulent” research. The settlement covered 10 banks.
The deal was put together by regulators including the securities and exchange commission and the National Association of Securities Dealers, plus New York state attorney general Eliot Spitzer.
William Donaldson, chairman of the SEC, said the research profession had become nearly unrecognisable. ”When a firm publishes favourable research without revealing to its customers that the research – far from being independent – was essentially bought and paid for by the issuer, we had no choice but to conclude that the research system was broken.”
Analysts should ”resume the role of gatekeeper and shed the recently acquired identity of cheerleader or marketer”.
The settlement imposes a series of reforms. They include the separation of reporting lines for research and investment banking, and making banks offer independent research alongside their own.
The settlement unearthed a fresh crop of emails that demonstrate how rife the conflict of interest issues were.
At CSFB, an analyst complained of the ”unwritten rules for tech research”. An investment banker had told him that the top of the list was: ”If you can’t say something positive, don’t say anything at all.”
At Lehman Brothers an analyst complained to his supervisor ”for the record, I have attempted to downgrade RSL Communications THREE times over the past year, but have been held off for banking reasons each time”.
Another analyst at the bank appeared less concerned. In an email to an institutional investor he said: ”Well, ratings and price targets are fairly meaningless anyway but yes, the ‘little guy’ who isn’t smart about the nuances might get misled, such is the nature of my business.”
At Goldman Sachs, a formal realignment process was put in place to improve collaboration between the research and investment banking. One analyst was asked: ”What are the three most important goals for you in 2000?”
The response was: ”1. Get more investment banking revenue. 2. Get more investment banking revenue. 3. Get more investment banking revenue.” – Guardian Unlimited Â