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Analysts on list of top scammers
NEW YORK (CNN/Money) - Stock analysts and unscrupulous brokers have joined the list of those engaged in top investor scams, according to an organization of state regulators released Monday.  "Record-low interest rates and a bear market on Wall Street have created a bull market in fraud on Main Street," said Joseph Borg, president of the North American Securities Administrators Association, which includes the securities regulators from the 66 states, provinces and territories in the United States, Canada and Mexico. New to the list this year is conflicts of interest by stock analysts in making recommendations to investors. The organization points out that it was a state official, New York Attorney General Eliot Spitzer, who led the way on this problem, winning a $100 million settlement from leading brokerage house Merrill Lynch & Co., along with promises to reform research practices. It said other state investigators are reviewing materials provided by a dozen firms for possible securities law violations. But state action in this area is under attack by Wall Street, according to the group. The organization said Morgan Stanley Dean Witter tried to introduce language into federal legislation in June that would have stopped states' probes into whether analysts intentionally misled investors. It said the NASAA led the fight to keep that limitation out of the final draft of the legislation. Morgan Stanley declined to comment on NASAA's claim. The organization listed unlicensed individuals, such as independent insurance agents, selling securities as the No. 1 investors fraud of the year, and unscrupulous stockbrokers as No. 2. Among the abuses it cited investors in at least 14 states losing close to $30 million from the sale of fictitious limited partnerships by independent insurance agents, as well as stockbrokers in North Dakota who allegedly issued phony account statements to cover up losses from hundreds of unauthorized trades. Charitable gift annuities and oil and natural gas scams were among the other new additions to this year's list of top scams. This is the third year the NASAA has compiled the list of investment scams. The following companies or some of the brokerage firms associated with Investment Banking business in the following stocks have been or are being investigated, by sundry government agencies, for FRAUD:
TALKING MONEY WITH BILL O'REILLY For Once He Says, 'Don't Take My Advice'“Mr. O'Reilly also holds shares of Merrill Lynch technology mutual funds — another losing proposition that he picked. ‘Merrill Lynch is a disgrace,’ he said. ‘Their mutual funds are disgraceful and have been for decades. They don't make any money.’” GERALDINE FABRIKANT, New York Times, 8/18/02 Merrill Replaced Research Analyst Who Upset EnronWASHINGTON, July 29 - In the summer of 1998, when it was eager to win more investment banking business from Enron, Merrill Lynch replaced a research analyst who had angered Enron executives by rating the company’s stock “neutral” with an analyst who soon upgraded the rating, according to Congressional investigators. The move by Merrill Lynch came after two Merrill executives wrote a memo that April to the firm’s president, Herbert Allison, saying that Merrill had lost a lucrative stock underwriting deal because Enron executives had a “visceral” dislike of the research analyst, John Olson, and what he told investors about Enron stock, according to documents obtained by investigators for a Senate panel looking into the relationship among Enron and its banks. Merrill vigorously disputes that there was any link between its rating on Enron and its desire to win more business from Enron. New York Times, RICHARD A. OPPEL Jr., 7/ 30/02 NEW YORK, June 28 (Reuters) By Nichola Groom - Investment banks that underwrote billions of dollars in bond sales by telecom companies that later tanked could be the next target of New York's crusading attorney general, Eliot Spitzer. Spitzer, whose probe into stock research that forced Merrill Lynch to pay $100 million has the investment community shaking in its boots, is looking into whether Wall Street firms knowingly supplied misleading information about bond sales by doomed companies, a spokeswoman for Spitzer told Reuters. Citigroup Faces Probes Following Grubman's Departure (Update1) - By Rob UrbanNew York, Aug. 16 (Bloomberg) -- Jack Grubman, the star telecommunications analyst at Citigroup Inc., resigned under pressure amid allegations he misled investors by issuing favorable stock ratings to win investment banking work. The legal challenges against his former employer his actions instigated remain. Citigroup faces criminal probes, a congressional subpoena, regulatory investigations and more than two dozen lawsuits over allegations that Grubman violated rules by functioning as an investment banker while he was employed as an analyst at the firm's Salomon Smith Barney unit. Grubman's resignation ``isn't going to change any liability that Salomon may have,'' said John Coffee, a securities law professor at Columbia University. ``No organization can avoid liability for conduct of their agents when they were in office by later seeing them resign.'' FOCUS FUNDS or FUNDS CONSISTING of ANALYST’S RECOMMENDATIONS - By James PatonNEW YORK, Aug 2 (Reuters) - Wall Street's high-profile stock analysts once carried so much clout with investors that the leading investment houses proudly built mutual funds around their "best ideas." Now, with the analysts better known for the famous bad calls they made on Enron ENRNQ, WorldCom WCOME and Internet stocks, their firms are giving up on the concept. Wall Street firms are abandoning funds that relied on their research departments' top stock picks, at a time when "sell-side" analysts have been tainted by allegations of bias and conflict of interest. "In this environment, it's obviously a pretty tough sell," said Russ Kinnel, director of research at Morningstar Inc. in Chicago. "Wall Street stock recommendations are of very little value" because they tend to tout investment banking clients. Goldman Sachs Group Inc. GS, Morgan Stanley MWD and Bear Stearns Cos. BSC offered portfolios that relied purely on recommendations of their brokerage analysts, instead of ideas from the stock sleuths on their money management teams. But now, Wall Street faces mounting scrutiny over allegations that juicy bonuses and pressure from executives have driven its analysts to issue overly rosy reports favorable to their firms' banking clients, or potential clients. Mutual fund firms and other big investors lack those inherent conflicts. Compensation for fund analysts and managers depends largely on their stock-picking ability, not whether they steer profitable investment banking deals to their firms. "There's a bad odor surrounding these analysts," said Roy Weitz, who runs the watchdog Web site FundAlarm.com. "The sell side (brokerage house business) is in the dog house right now, so they probably said, 'Let's just wipe the slate clean.'" The Goldman Sachs Research Select Fund and the Morgan Stanley Competitive Edge "Best Ideas" Fund announced in documents filed with U.S. regulators that they are giving up on their original mandates, depending now on their traditional fund managers and in-house analysts, rather than brokerage analysts. Representatives for those firms declined to give reasons for the moves. But weak performance appeared to be a factor, since the funds have generally done worse than the market as a whole. The Goldman Sachs fund has fallen 37 percent in the last 12 months, while the Morgan Stanley portfolio is down 24 percent in that period, according to Morningstar. Meanwhile, the Standard & Poor's 500 Index, which the Goldman fund aimed to beat, has dropped 25 percent in the last 12 months. The $154 million Research Select Fund now will be run by stock pickers on the firm's value and growth investment teams. The fund had been based on the firm's U.S. Select List, a batch of stocks recommended by its stock analysts. But the list was discontinued when Goldman Sachs announced changes to its stock rating system last month, a spokeswoman said. The $30 million Morgan Stanley fund, which relied on the "Best Ideas" list compiled by its stock research team, has changed its name to the Global Advantage Fund, and will look for an array of investment opportunities around the world. Bear Stearns has renamed its Bear Stearns Focus List Portfolio the Bear Stearns Alpha Growth Portfolio, effective Aug. 1. The fund is no longer modeled on the "buy" list of the Bear Stearns research department. A spokeswoman for Bear Stearns Asset Management said the change was not related to concerns about sell-side research or fund performance, saying the fund changed its strategy so it could use the techniques of new manager Jim O'Shaughnessy, who uses quantitative models to pick stocks. "It's definitely not related to any of the research issues," spokeswoman Braden Bledsoe said. Attracting money into funds that highlight Wall Street analysts' research may have been easy when everyone was raking in money during the bull market -- but not today. "These funds, the 'best picks,' tended to be marketing driven, rather than investing driven," said Burt Greenwald, a fund industry consultant. "I question whether there's any basic intrinsic value in these things, and I assume that any fund a company offers represents the best ideas they have." ((--James Paton, U.S. Fund Desk, 646-223-6134, james.paton@reuters.com, with additional reporting by Martha Graybow--)) Regulators Find Another Analyst With Questionable ReportsThe correspondence, which dates back to November 2000, also indicates how much influence investment bankers had over a research analyst at the firm, Donaldson, Lufkin & Jenrette, during the bull market. They were between the head of equity research and an analyst at Credit Suisse, which acquired Donaldson, Lufkin & Jenrette on Nov. 3, 2000. The analyst was Kevin A. McCarthy and the subject of the messages is his reports on Lantronix Inc., a network device server company. Donaldson managed the initial public offering of the shares on Aug. 4, and several weeks later, Mr. McCarthy recommended Lantronix to investors. After the acquisition of Donaldson, Mr. McCarthy joined Credit Suisse, where he follows technology stocks. In the correspondence, Mr. McCarthy tells Elliott Rogers, then the head of equity research, that investment bankers at Donaldson put pressure on him to write positively about Lantronix even though the initial public offering had fallen flat. In the days before the public offering, the size and price of the issue was reduced significantly. On its first day of trading, Lantronix shares fell 20 percent from the offering price of $10. Mr. McCarthy nevertheless recommended Lantronix stock to investors several weeks later on Aug. 30. That was also the day that Credit Suisse announced it would acquire Donaldson. By then, Lantronix stock had bounced back to $10.56, and Mr. McCarthy assigned it a 12-month price target of $17 a share. Shares of Lantronix shares closed at 70 cents yesterday. In the e-mail messages, dated Nov. 8, Mr. McCarthy said he had felt forced into recommending Lantronix by investment bankers at Donaldson and that his involvement with the company was "an embarrassment." He also stated that the bankers had "acted as a proxy for management" of Lantronix and stonewalled his attempts to do in-depth analysis of the financial statements. When the e-mail messages were written, Lantronix stock had plummeted to $5.4375. But Mr. McCarthy still rated Lantronix a buy; his report on the company, which he had written at Donaldson, was transferred to Credit Suisse. Privately, he derided the company to Mr. Rogers. "I put my reputation on the line to sell this piece" of junk, he wrote, "calling favors from very important clients." New York Times, GRETCHEN MORGENSON September 12, 2002 WASHINGTON, Oct 1 (Reuters) - Wall Street's top regulator on Tuesday said it would fine Morgan Stanley's MWD Dean Witter Reynolds unit as part of a settlement in which the SEC alleged the firm failed to properly supervise a broker who lost more than $15 million of his clients' money. Dean Witter consented to the entry of an order that finds the brokerage failed to properly supervise one of the firm's former high-producing brokers, Mark Rodgers, the Securities and Exchange Commission said. Rodgers' Clearwater, Florida clients, some elderly, "entrusted Rodgers with a substantial amount of their savings," the SEC said -- some of which, the agency alleged, he invested without their permission and eventually lost. Dean Witter's compliance procedures were such that Rodgers' misconduct went unnoticed, the SEC's Ivan Harris told Reuters. The company did not conduct reports that would have detected the amount of shares Rodgers had bought in e-Net stock at the height of his misconduct in 1998 because Dean Witter's compliance department was understaffed, the SEC alleged. Spitzer Sues Executives of Telecom Companies
Eliot Spitzer, the attorney general of New York, sued former top officials of five telecommunications companies yesterday, contending that they had steered investment banking business to Citigroup in exchange for inflated ratings on their companies' stocks and new shares of other companies. After filing suit in State Supreme Court in Manhattan, Mr. Spitzer said he wanted the executives, including Bernard J. Ebbers, former chairman of WorldCom, to give back more than $1.5 billion in "ill gotten" personal gains to the shareholders of the companies they ran. That sum included $28 million in profits on shares of initial public offerings and far larger gains on stock and options of their own companies. The other defendants were Joseph P. Nacchio, former chief executive of Qwest Communications International and Philip F. Anschutz, its former chairman; Stephen A. Garofalo, chairman of Metromedia Fiber Network; and Clark E. McLeod, former chief executive of McLeod USA. Each was named last year in a wrongful-termination lawsuit filed by David Chacon, a former Citigroup broker who contended that the firm favored corporate executives when allocating new stocks. Mr. Spitzer's suit contends that each defendant reaped gains of several million dollars on shares allocated to him by the Salomon Smith Barney unit of Citigroup, through a practice known on Wall Street as spinning. In turn, Mr. Spitzer said, each of them directed his company to pay Citigroup tens of millions of dollars in investment banking fees. "This case exposes further conflicts of interest on Wall Street," Mr. Spitzer said. "The spinning of hot I.P.O. shares was not a harmless corporate perk. Instead, it was an integral part of a fraudulent scheme to win new investment banking business." In a Feb. 21, 2001, e-mail message cited in the complaint, Mr. Grubman threatened to "put the proper rating" on the stock of Focal Communications, which he said every smart institutional investor "feels is going to zero." Mr. Grubman had reiterated his buy rating that day, with the stock trading at $15.50 a share, but indicated he believed he should lower it three notches. He kept his buy on Focal's stock for five more months. By then, it had dropped to $1.24, the complaint said. But the complaint contended that the positive bias of Citigroup's stock-rating system bothered some of the firm's senior executives, citing one who called it "ridiculous on its face." Another, Jay Mandelbaum, who oversaw Salomon's brokerage division, threatened early last year to stop contributing to the firm's research budget because the research it produced was "worthless," according to the complaint. "I think he's got significant evidence of fraud in these papers," Mr. Coffee said. Jeffrey L. Liddle, a lawyer in New York who represents Mr. Chacon, said he was gratified to see Mr. Spitzer pursuing the allegations his client made more than a year ago. "This is just plain old-fashioned bribery and extortion," Mr. Liddle said. "They're just using a different currency." |
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