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Attorney General Expands Wall Street Probe

Apr 10, 2002 | USA Today The New York attorney general has issued subpoenas to at least five more Wall Street firms, expanding his effort beyond Merrill Lynch into other brokerages that might have misled investors with tainted stock recommendations.

Eliot Spitzer is going after firms that might have touted stocks in an effort to gain lucrative investment banking business — such as underwriting stock or bond sales.

He is working with the Securities and Exchange Commission and is considering criminal charges against the firms.

"The goal is simply to protect investors and make sure information provided to them is honest and satisfies the mandate of lawful disclosures," Spitzer said.

Spitzer is now targeting Morgan Stanley, Credit Suisse First Boston, Goldman Sachs, Salomon Smith Barney and at least one other firm, according to a person familiar with the investigation.

On Monday, Spitzer got a court order against Merrill Lynch, the nation's largest brokerage, to force the firm to restructure its stock research division to eliminate any conflicts of interest with the investment banking division.

"The evidence assembled so far makes it clear that Merrill Lynch was providing tainted and biased reports," he said.

Merrill Lynch, which denied the accusations and won a three-day stay of the order, is expected to appear in court today to present a plan about how it will comply with the order.

Spitzer zeroed in on comments by Merrill's former star Internet analyst, Henry Blodget, who maintained bullish ratings on stocks that he candidly slammed in internal e-mails.

But Blodget was not alone in recommending stocks long after they had plummeted.

Mary Meeker, the Internet industry analyst at Morgan Stanley, and Jack Grubman, the telecommunications analyst for Salomon Smith Barney, have also been widely criticized for their bullish ratings on companies that were also investment-banking clients of their firms.

Credit Suisse First Boston, Morgan Stanley and Salomon Smith Barney declined to comment. Goldman Sachs and Lehman Bros. said they have not received subpoenas.

Spitzer, who is up for re-election this year, has raised some eyebrows with his aggressive tactics.

"This may be overkill," says Samuel Hayes, a finance professor at Harvard Business School. "I have no doubt there have been practices that have been sloppy at best, and perhaps intentionally misleading, but I haven't seen evidence yet to suggest a wholesale indictment of Wall Street."

The SEC and the National Association of Securities Dealers have proposed rules to reduce conflicts of interest on Wall Street and improve public disclosure.

But Spitzer said, "I'm not willing to wait for others where years have gone by with inadequate regulation."

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