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E-Mails Suggest Conflicts at CSFB

Securities: The messages indicate analysts issued good ratings to appease corporate clients.


Regulators' probes of potential conflicts of interest among brokerage analysts have turned up new evidence suggesting that analysts touted some stocks solely to please their firms' investment bankers.

Several internal e-mails from Credit Suisse First Boston show analysts at the firm complaining about or mocking the influence bankers had on their stock recommendations.

In one e-mail two years ago, technology analyst Kevin A. McCarthy charged that the firm's investment bankers "acted as a proxy for management" of Lantronix Inc. in the Irvine tech company's August 2000 initial public offering, and led him to put his reputation on the line "to sell this piece of crap."

The e-mails, obtained by the Times from a source close to the investigation, echo Merrill Lynch & Co. internal messages disclosed in spring by New York State Atty. Gen. Eliot Spitzer as part of his office's probe of the firm.

Several Merrill analysts were quoted privately disaparaging Internet stocks they were publicly touting to investors in 1999 and 2000.

Merrill agreed to pay $100 million to settle charges of tainted stock advice. Since then, state regulators and the Securities and Exchange Commission have launched new investigations into analyst conduct across Wall Street.

"What we found has been very troubling," said William Galvin, Massachusetts secretary of state and the state's securities regulator. His office is leading the investigation of Credit Suisse, a unit of Credit Suisse Group.

"It's clearly unethical and it may go beyond that to illegal if there's a quid pro quo involved [in analysts' recommendations], and that remains to be seen," Galvin said. "Investors have to be sure that it's good-faith advice they receive but that may not be the case if [analysts] acted in bad faith to advance corporate profits."

In a May 2001 e-mail, CSFB software analyst Erach Desai complained that he has had to adapt to demands of the company's investment bankers, who garner big fees from companies for handling their financing needs. Desai said that "unwritten rules" to keep corporate clients appeased "have clearly hindered my ability to be an effective analyst."

In a March 2001 e-mail, CSFB software analyst George Gilbert said a colleague, referring to IPOs he touted, told European investors that "most of his IPOs never should have gone public." Gilbert also wrote: "Clients didn't find his comment amusing, especially when he said we all got our bonuses for a good year."

The e-mails may further erode confidence in Wall Street research, said Southern Methodist University law professor Alan Bromberg.

"If there's any investor confidence left, this new information will almost certainly demolish it," Bromberg said.

More than 30 states have joined a nationwide task force digging into alleged conflicts of interest among analysts.

The task force started work from material obtained by investigators for Spitzer. His revelations about Merrill Lynch triggered a firestorm in Congress and on Wall Street.

CSFB spokeswoman Victoria Harmon would not comment about the e-mails beyond a statement: "Early on, we welcomed, fully endorsed and have been implementing the Spitzer initiative to make systemic changes to strengthen analyst independence. We are now working closely with the regulators and government officials on these matters."

The first e-mail arose from the poor showing of Lantronix stock on its opening day in August 2000. Donaldson, Lufkin & Jenrette, which Credit Suisse was about to acquire, handled the offering.

But the IPO didn't go well. The size of the deal was cut in half, and the stock, priced at $10 a share, lost $2 in its first day. On Aug. 30, 2000, McCarthy rated the shares a "buy" and issued a 12-month forecast of $17 a share. The price struggled to reach $10.75 in early September 2000, then quickly fell to the $5-to-$6 range.

The stock was hammered earlier this year after the company revealed that it had inflated revenue by more than $6 million. The stock closed Thursday at 58 cents, down 12 cents, on Nasdaq.

After Credit Suisse completed its purchase of DLJ in November 2000, McCarthy was asked about the deal and his recommendation.

In an e-mail to his boss, Elliott Rogers, McCarthy said he agreed to look at Lantronix because DLJ didn't have a networking analyst.

"Once I was in, the [DLJ] bankers [in the Los Angeles office] acted as a proxy for management and we had to fight to get straight answers from these guys on every single line item," McCarthy wrote. "I put my reputation on the line to sell this piece of crap, calling favors from very important clients.

"The deal was an embarrassment to me and the firm, and I wasted a lot of bullets to get it done," he wrote.

Rogers is no longer at Credit Suisse and could not be located for comment.

McCarthy, whose voicemail says he is traveling, didn't return messages seeking comment. Lantronix executives were unavailable for comment.


Bloomberg News was used in compiling this report.

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