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House Widens IPO Probe to 2 More Banks

Securities: A committee requests data from Goldman Sachs and CSFB on their business dealings with tech firms.

September 05, 2002|WALTER HAMILTON | TIMES STAFF WRITER

NEW YORK — An investigation of Wall Street's conduct during the late-1990s bull market intensified Wednesday as Congress asked two more investment banks for information about their research analysts and new-stock offerings.

The House Financial Services Committee sent letters to Goldman Sachs Group Inc. and Credit Suisse First Boston. The committee is seeking details about the brokerages' business dealings with more than two dozen companies, including information on any allocations of initial public stock offerings to company executives.

Most of the firms named in the letters are telecom or Internet businesses, including Commerce One Inc., Global Crossing Ltd., Razorfish Inc. and IVillage Inc. Energy trader Enron Corp. also is included.

The committee asked for the data by Sept. 19 and said it may issue subpoenas if the brokerages do not fully comply.

The requests grew out of the committee's investigation of Salomon Smith Barney and that firm's allocation of sought-after IPO shares to top management of WorldCom Inc. The committee released documents last week showing that former WorldCom Chief Executive Bernard J. Ebbers earned $11 million on IPOs he received from Salomon, a unit of Citigroup Inc.

The House committee's investigation of Wall Street is one of several underway at the state and federal levels. The inquiries, including those by the New York attorney general and the Securities and Exchange Commission, center on whether apparently long-ingrained brokerage practices hurt individual investors and contributed to the collapses of firms such as Enron and WorldCom.

The letters to Goldman and CSFB, which come a week before the anniversary of Sept. 11, also illustrate the degree to which sentiment toward Wall Street has grown increasingly antagonistic. Though investment banks were faulted before the terrorist attacks for alleged abuses in the late 1990s, the criticisms were largely muted in the months after Sept. 11.

Now, however, Wall Street is being skewered by politicians who are alleging an array of wrongdoing during the long bull market.

The House committee's investigation centers on whether brokerages allocated coveted IPO shares to curry favor with company executives--assuring that the executives would grant the brokerages fee-rich investment-banking business.

Any such quid pro quo, if undisclosed, would violate securities laws, experts say.

Investigators also are looking at the role brokerage research analysts played in pumping up tech stocks and in continuing to tout them to individual investors even as share prices began to collapse in 2000.

Wall Street critics have lashed out at some analysts' close relationships with executives of the companies they were supposed to be objectively evaluating.

Though the committee had been focusing on Salomon Smith Barney, "It's important that we look beyond one firm to get a bigger picture of how common these practices were on Wall Street," said Peggy Peterson, a spokeswoman for Rep. Michael G. Oxley (R-Ohio), the committee chairman.

Goldman and CSFB said they would cooperate with the committee.

"We're more than happy to cooperate with Rep. Oxley's request, although we are surprised to have been asked," Goldman said in a statement. "We too have read recent reports of so-called industry practices, and they do not accord with how we do business at Goldman Sachs."

A spokeswoman for CSFB, a unit of Credit Suisse Group, said "We continue to cooperate with all authorities." She declined to comment further.

The committee asked CSFB for details about its dealings with 15 companies; it asked Goldman for information about 14 companies.

The committee asked both brokerages for detailed information about the recommendations of the stock analysts who covered the named companies, and the total compensation the analysts have received since Jan. 1, 1996.

Investigators also are seeking e-mails and other communication between analysts and their supervisors and between analysts and executives of the firms named. The committee also wants to see the appointment calendars of the analysts from 1996 to the present.

The information requests may guarantee that investment banks will face a continued stream of bad publicity, some experts say.

Unlike many of the other regulatory inquiries underway, the House committee's investigation has played out on the public stage through the frequent release of data. That has created a public-relations nightmare for the investment banks, which typically shun the limelight.

"The image of Wall Street as a tool for enriching corporate executives at the expense of average Americans is perpetuated by the congressional pressure," said Jacob Frenkel, a former prosecutor and SEC enforcement attorney now in private practice.

In terms of the number of headlines being generated, the House committee's investigation has at least temporarily eclipsed a similar examination being done by New York State Atty. Gen. Eliot Spitzer.

In April, Spitzer stunned Wall Street by releasing subpoenaed e-mails from Merrill Lynch & Co. analysts, showing that the analysts were privately disparaging Internet stocks in 1999 and 2000 even as they continued to tout the shares to the public.

Merrill settled Spitzer's allegations by agreeing to pay $100 million and to reform its research practices. Other investment banks also have said they will reform their practices.

Spitzer is continuing his investigation, focusing on Salomon and Morgan Stanley.

Under a deal worked out among a group of state securities regulators earlier this summer, major brokerages are facing probes by one or more of the regulators. Massachusetts, for example, is investigating CSFB, and Utah is investigating Goldman Sachs.

The House committee, in its letters to the brokerages, asked for "all information relating to the ongoing investigation" of the firms by the states.

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