BROKERS: Almost all major brokerage firms in the United States - solid institutions long trusted by clients - are to be investigated by the New York state attorney-general's office for evidence of hyping stocks to gain business at the expense of investors.
The widespread inquiry into disinformation on Wall Street follows a 10-month investigation of Merrill Lynch by the New York chief prosecutor that turned up damning e-mails, which showed that high-profile analysts were privately scathing about companies that they were promoting to clients.
The big-name companies to be be investigated reportedly include Goldman Sachs, Credit Suisse First Boston, Morgan Stanley, Lehman Brothers Holdings, UBS Paine-Webber, Salomon Smith Barney, Lazard Frères and Bear Stearns.
The 37-page report of New York state attorney-general Mr Eliot Spitzer into Merrill Lynch is being seen in the financial world as the smoking gun that implicates much-vaunted analysts in a pattern of deception.
The investigation centred on the firm's internet research group, led by star performer Mr Henry Blodget, who recently left Merrill Lynch after receiving salary and bonuses for 2001 amounting to $12 million. Long after internet stocks crashed, ruining the portfolios of many small investors, Mr Blodget and other prominent analysts were recommending "buys" on failing start-ups.
The brash 34-year-old researcher first gained prominence when he predicted, accurately, in 1998 that Amazon would rise to $400 from $232. As the stock collapsed when the dotcom bubble burst, he continued to recommend clients to buy. Today it trades at less than $10.
"Only the clients were deluded, not the analysts" during the dotcom mania, said the New York Times in a scathing editorial yesterday.
The report shows that the "Chinese wall" between Merrill Lynch's analysts and its bankers was often a fiction and the brokerage firm used the prospect of a favourable assessment as an inducement to obtain their business.
Mr Spitzer has won a court order requiring the company to disclose in future whether it has or intends to have an investment banking relationship with a corporate client. In response to growing outrage since the dotcom crash, Merrill Lynch has independently forbidden analysts from trading in stocks on which they issue reports.
The e-mails, which turned up in the investigation, shed light on an atmosphere of deep cynicism in Merrill Lynch. In one e-mail, a member of Mr Blodget's staff, Ms Kirsten Campbell, protested against wrong advice, saying: "We are losing people money and I don't think that's the right thing to do."
A company called GoTo objected to Ms Campbell's assessment that it would not make a profit until 2003. A GoTo executive threatened that "Merrill will never take my company public", in an attempt to make her issue a more favourable report. Initial public offerings or floatations are hugely profitable for investment banks.
When Merrill Lynch issued the report, it forecast that GoTo would make a profit in 2002. Ms Campbell took issue with this, saying she did not wish to be a "whore" for management.
In another exchange of e-mails, an investor asked Mr Blodget, "What's so interesting about GoTo except banking fees?" His response was "nothin". "
The technology stock InfoSpace remained on Merrill Lynch's recommended buy list for five months in 2000 after Mr Blodget said privately that the stock was a "powder keg" and many institutions had raised "bad smell comments" about it.
Mr Spitzer has said he wants major structural changes in the way Wall Street firms provide stock research. He is considering criminal charges where investment banks appear to have deliberately misled investors by producing over-optimistic forecasts on company performance.
Merrill Lynch said in a statement that "there is no basis for the allegations" and the firm was "confident that a fair review of the facts will show that Merrill Lynch has conducted its research with independence and integrity".
