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Brokerage Probe Widens

Source Says Subpoenas Issued By Spitzer to Morgan Stanley, Salomon, Others And More Expected

Apr 10, 2002 | CNN/Money

In addition to Merrill Lynch, the state of New York is investigating a wide number of major brokerage firms, including Goldman Sachs, Salomon Smith Barney and Morgan Stanley, for possibly issuing misleading stock ratings, CNNfn has learned.

A source familiar with the situation told CNNfn that subpoenas have been served by New York Attorney General Eliot Spitzer to Morgan Stanley, Salomon Smith Barney, Credit Suisse First Boston, Bear Stearns and UBS-PaineWebber.

Subpoenas are expected to be served this week to J.P. Morgan, Goldman Sachs and Lazard Freres, the source said.

Morgan Stanley, Credit Suisse First Boston and Salomon Smith Barney declined to comment.

A spokesman for Goldman Sachs said to his knowledge the brokerage house had not received any subpoenas.

On Monday Spitzer obtained a court order requiring Merrill to institute immediate reforms. He charged analysts issued top ratings for companies they believed were bad investments in an effort to please the firm's investment banking clients.

The action comes as Congress is looking into the role analysts may have played in the Enron case. Some investment firms kept Enron at a "buy" rating even when the company was headed toward bankruptcy.

Some of Merrill's analysts, including former investing guru Henry Blodget, will be required under a state securities law, called the Martin Act, to testify about the discrepancies between their positive public reports about certain companies and the comments they made in private.

Spitzer said copies of internal communications at Merrill showed that even the analysts did not believe the ratings they were issuing.

He released e-mails from analysts that suggested they were uncomfortable with the pressure being applied by investment banking customers in reaction to potential negative comments from analysts.

"The more I read of these, the less willing I am to cut companies any slack, regardless of the predictable temper-tantrums, threats and/or relationship damage that are likely to follow," reads one e-mail from Blodget. "If there is no new e-mail forthcoming from [Merrill management] on how the instructions should be applied to sensitive banking clients/situations, we are going to just start calling the stocks ... like we see them, no matter what the ancillary business consequences are."

Spitzer also said an analyst called Infospace Inc. a "piece of junk" on Oct. 20, 2000, despite a top "buy" rating.

"I suspect that there are many analysts anxiously going through their old e-mail files to see if they have any smoking guns," said Charlie Crane, strategist at Victory SBSF Capital Management, which oversees $4 billion.

"Analysts are going to be pretty scared," said David Geracioti, editor of Registered Rep magazine, which covers retail brokers. "The silly season has ended and now someone must pay."

Merrill said Monday the e-mails cited by Spitzer showed no evidence of wrongdoing and said there is no basis for the allegations.


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