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SEC Probes Analysts' Supervision

Several securities firms reportedly receive subpoenas as regulators look into possible misconduct higher up the ladder.

June 03, 2003|Robert Schmidt | Bloomberg News

Citigroup Inc., Merrill Lynch & Co. and eight other securities firms that settled analyst conflict-of-interest allegations with regulators in April have received subpoenas seeking information on how their analysts and bankers were supervised, people familiar with the situation said.

The subpoenas were sent last week and request e-mails and other correspondence, as well as brokerage organizational chart details, the sources said.

When the settlement was announced, New York Atty. Gen. Eliot Spitzer and Securities and Exchange Commission Chairman William Donaldson said they were continuing to investigate Wall Street executives for possible failure to supervise analysts.

Regulators stressed that the settlement, which securities firms signed without admitting or denying guilt, didn't preclude charges against individuals.

The latest legal action is the next phase of a probe into brokerages' use of favorable research reports to win fee-rich investment-banking business during the bull market.

The investigation of supervisors probably will help shareholders of failed telecommunications and Internet companies who are suing the brokerages for their losses, alleging that they were misled by tainted brokerage research, attorney Jacob Zamansky said. His 2001 arbitration claim against Merrill Lynch, on behalf of an investor who lost money in tech stocks, sparked Spitzer's initial probe of Wall Street research.

Regulators "are going up the ladder from the analysts to the people who allowed them to carry on the way they did," Zamansky said. "It's a welcome sign if they are going after these supervisors. Unless they change the supervision, nothing's going to change."

An SEC spokesman declined to discuss the specifics. "Subpoenas are nothing other than a means of obtaining information," the agency's Herb Perone said. "They certainly don't suggest that the commission has reached any conclusions about their subjects or that a case is likely to, or even could, be brought against their recipients."

In the April settlement, the 10 brokerages agreed to pay $1.4 billion, to separate analysts from investment bankers and to stop granting sought-after initial offering shares to banking clients.

When the agreement was announced, Donaldson said the SEC's investigation of individuals at the firms would continue with an emphasis on the work of analysts' supervisors.

Other regulators, including the NASD (formerly the National Assn. of Securities Dealers), also are investigating the role of Wall Street analysts' supervisors in the boom and subsequent collapse of share prices that resulted in the loss of more than $7 trillion of shareholder wealth in the last three years.

"If the other shoe is dropping and they are moving against the individuals who were responsible, we may see a solution appropriate for the damage they have done to the capital markets," Samuel Hayes, an investment banking professor at Harvard Business School, said.

The 10 securities firms in the settlement were Bear Stearns Cos., Citigroup, Credit Suisse First Boston, Goldman Sachs Group Inc., J.P. Morgan Chase & Co., Lehman Bros. Holdings Inc., Merrill Lynch, Morgan Stanley, UBS Warburg and U.S. Bancorp Piper Jaffray.

Merrill spokesman Mark Herr, Citigroup spokeswoman Leah Johnson, CSFB spokeswoman Christina von Bargen and Morgan Stanley spokeswoman Judy Hitchen declined to comment. Bear Stearns spokesman Russell Sherman didn't return phone calls. Calls to Goldman Sachs weren't returned.

Spitzer spokesman Darren Dopp declined to comment.

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