States Go After Wall Street

By: - November 8, 2002 12:00 am

States are following New York’s lead and pursuing Wall Street firms whose analysts have publicly touted stocks that they don’t really consider good buys in the hopes of helping their companies win more investment-banking business.

Just last month, Massachusetts fired a complaint against Credit Suisse First Boston Corp and Utah may be next in the states’ war against conflict of interest on Wall Street.

The states’ probes continue even as Wall Street regulators and 10 of the largest investment firms are trying to negotiate a package of reforms that would ultimately resolve the array of ongoing investigations into the Street’s practices. Negotiations are going on this week although few expect a settlement to be ironed out at a time when many attorney generals are busy with post-election business.

New York Attorney General Eliot Spitzer has led the charge against Wall Street shenanigans. The eye-popping million settlement that Spitzer reached with Merrill Lynch this past May was the gold standard, but states are willing to settle for less.

As part of the Merrill Lynch settlement, the securities giant agreed to separate its analysts from its investment-banking business. Just under half of the million of the Merrill Lynch settlement went to New York and the remaining million was shared among the 49 states, District of Columbia and Puerto Rico.

“I wouldn’t be surprised if there were more lawsuits,” says Peg O’Hara of the Council of Institutional Investors, a Washington, D.C., organization that represents some 120 pension funds. The council this fall called on the investment profession and its regulators to adopt reforms to eliminate conflicts of interest in the financial services industry.

“Frankly, it makes no sense for a state attorney general not to file,” says Phillip Brown, chief executive officer of Global Securities Information, a Washington, D.C., firm that specializes in financial securities services.

Going after Wall Street rogues can help boost the state’s coffers if there is a settlement and is a way for a state attorney to get national attention even without an agreement. “It’s like the tobacco settlement,” Brown says.

The issues Spitzer raised in his probes prompted the states to coordinate their attack. States formed a task force with the North American Securities Administrators Association (NASAA), a Washington, D.C.,-based organization that represents all 50 state securities agencies. New York, California and New Jersey co-chair the task force and members are essentially dividing up large securities firms to investigate.

In its a complaint last month, Massachusetts charged Credit Suisse First Boston Corp. with “misleading investors on the undue influence its investment banking exerted on its supposedly independent research analysts,” Secretary of the Commonwealth William Francis Galvin said when the state filed the charge Oct. 21.

Salomon Smith Barney is among the security firms currently in Spitzer’s crosshairs. Across the river, New Jersey authorities are investigating Bear Stearns; Utah is looking at Goldman, Sachs and California is probing the activities of Thomas Weisel Partners.

States aren’t putting their own probes on the backburners while Spitzer, the Securities and Exchange Commission, NASAA, New York Stock Exchange and the National Association of Securities Dealers try to hammer out what has been dubbed “the global agreement.” Instead, any action brought by an individual state against a securities firm could be wrapped into the global agreement.

A state’s interest and involvement in Wall Street practices can hinge on state law. Attorney generals in only 27 jurisdictions have the authority to seek criminal proceeding, according to the National Association of Attorneys General. New York has among the most powerful state security laws. The attorney general in New York doesn’t have to prove that a security dealer intended to commit fraud, only that a fraud occurred. That’s a lower threshold than most other states, which must prove intent.

And for investment firms themselves, some aren’t waiting for new marching orders from regulators. Citigroup announced in late October it was splitting its research and investment banking groups.

Our stories may be republished online or in print under Creative Commons license CC BY-NC-ND 4.0. We ask that you edit only for style or to shorten, provide proper attribution and link to our web site. Please see our republishing guidelines for use of photos and graphics.