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12 States Join N.Y. Probe Of Wall Street

Apr 25, 2002 | The Washington Post

New York State Attorney General Eliot Spitzer said yesterday that a dozen other states are joining him in an expanded investigation of Wall Street firms' practice of touting stocks of companies that pay them fees.

In an interview during a visit to Washington to talk to members of Congress and federal regulators, Spitzer applauded the interest of other states, noting, "We don't have the resources to pursue every angle."

Spitzer also said he already has gathered enough evidence from Merrill Lynch & Co. to file civil, or perhaps even criminal, charges under his state's securities fraud law. And he criticized as "insufficient" pending rules designed to protect analysts' independence. Merrill has agreed to disclose more about business the firm does with companies whose stocks it rates. But Spitzer said the two sides remain "pretty far apart" on a final settlement of the case. "We've still got a long way to go," he said, adding that "we could bring charges today if we felt compelled to do so."

He said e-mails -- which show some Merrill Internet analysts rated stocks as "buys" while privately calling them they "junk" or worse -- were enough evidence to charge Merrill Lynch as a firm, or individual employees, with manipulating the stock market and perpetrating fraud against investors.

Spitzer said former mayor Rudolph W. Giuliani called him on Merrill's behalf just before his office filed the e-mail excerpts. Giuliani's arguments about the case were "not persuasive," he recalled, but Giuliani also urged Spitzer to take into account the Merrill's importance as a major employer in New York and its decision to remain downtown after the Sept. 11 terrorist attacks.

A Merrill Lynch spokesman declined to comment on Spitzer's remarks or to characterize the status of the negotiations.

Spitzer has also sent subpoenas seeking information regarding the relationship between research reports and investment banking business to a handful of other Wall Street firms including Salomon Smith Barney, whose telecommunications analyst, Jack Grubman, has been widely criticized for remaining bullish on obscure companies even as the stocks of those companies dropped in value. Officials in Spitzer's office have said that Grubman and other high-profile analysts who gained fame during the stock boom of the late 1990s would be part of their investigation.

On the state front, a new 12-state task force is intended to leverage legal authority and resources and build on Spitzer's probe, according to Ashley Baker, spokesman for the North American Securities Administration Association. The group will be led by New York, New Jersey and California because those states have the most expertise and resources. "We will be investigating and building on what [Spitzer has] done," he said.

Andre Pineda, Assistant Commissioner for the California Department of Corporations, said, "Our interest here is California consumers, getting a sense for whether California investors were misled." He said his office already has issued two subpoenas to Merrill Lynch.

In the interview, Spitzer said regulations recently proposed by the National Association of Securities Dealers and the New York Stock Exchange do not go far enough toward eliminating what he called an incentive structure on Wall Street that encourages analysts to write reports that please their firms' corporate clients rather than inform investors.

He said "nothing in the current structure at Merrill Lynch" would change based on the proposed rules.

Officials in Spitzer's office would not discuss his meeting with Securities and Exchange Commission officials.


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