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Case Shows How Firm Walked Over Investors

May 30, 2003 | Bloomberg News

Bank of America Corp. made an undisclosed payment to U.S. Bancorp Piper Jaffray in 1999 to publish research on Just for Feet Inc., a client that went bankrupt later that year, said people familiar with the matter.

The payment came two months after the securities unit of Bank of America arranged the April sale of $200 million of high-yield, high-risk bonds for Just for Feet, a shoe retailer. Most of the proceeds were used to repay loans to Charlotte, N.C.-based Bank of America, the third-largest U.S. bank.

Minneapolis-based Piper Jaffray received $400,000 in connection with the Just for Feet junk-bond sale, according to documents in last month's $1.4 billion settlement between Wall Street firms and regulators over misleading research. At the end of May 1999, Piper Jaffray was the only brokerage to recommend buying the stock.

While Bank of America wasn't part of the regulatory probe into analysts' conflicts of interest, its payment was similar to those made to brokerages by Morgan Stanley and four other firms during the 1990s stock boom. Those transactions broke securities rules because they included "material" information that wasn't disclosed, the National Association of Securities Dealers said.

"The line of wrongdoing doesn't stop with the banks that were part of the Wall Street settlement," said Donald Langevoort, a Georgetown University law professor. "Securities laws have long said 'disclose your conflicts' to let investors decide whether a recommendation is tainted by bias."

The 10 firms in the record Wall Street settlement neither admitted nor denied charges that they published misleading research to attract investment-banking clients. Securities firms paid, or were paid, at least $7.6 million for publishing research about clients, documents from the settlement showed.

Piper Jaffray paid a $32.5 million penalty in the settlement. >From 1999 to 2001, according to NASD, the firm got more than $1.8 million from rivals in exchange for issuing research reports and other services. Piper paid $430,000 to other firms to provide research for its own clients.

Bank of America made at least part of the $400,000 payment related to the Just for Feet sale to Piper Jaffray, said four people familiar with the transaction who requested anonymity.

"Because of ongoing litigation involving Just for Feet, we have no comment on this," said Bank of America spokeswoman Jennifer DiClerico. Just for Feet investors have sued the bank, claiming it failed to alert prospective bondholders to the company's "dire financial situation," say court documents.

Erin Freeman, a spokeswoman for Piper Jaffray, a unit of U.S. Bancorp, declined to comment. Deborah Bortner, a securities administrator for Washington state, which led the Piper Jaffray investigation, also declined to comment.

Bank of America shares, up 5.8 percent this year, slid 76 cents to $73.58 in New York Stock Exchange composite trading. U.S. Bancorp stock fell 49 cents to $23.04, cutting its gain for the year to 8.6 percent.

Six Wall Street research analysts covered Just for Feet on May 1, 1999, and all rated the stock "strong buy," according to Thomson Financial. By the end of that month, after the retailer missed earnings estimates, five analysts downgraded the shares to "neutral."

Piper Jaffray retail analyst Brent Rystrom cut his recommendation to "buy" on May 26. He dropped it to "neutral" on Sept. 21, after the stock had plunged 81 percent that year. Rystrom didn't return calls seeking comment.

After its bankruptcy filing, Just for Feet sold its brand name, 79 superstores, 23 specialty stores, an Internet business and its corporate headquarters for $72.6 million in cash and debt to Footstar Inc.

Earlier this month, a former divisional president, Adam Gilburne, pleaded guilty to helping then-CEO Harold Ruttenberg inflate income and earnings from December 1996 to November 1999.

Ruttenberg, now a Birmingham restaurateur, didn't respond to calls for comment.

Gilburne pleaded guilty to conspiracy to commit wire fraud and securities fraud and faces from 30 months to 78 months in prison under federal sentencing guidelines. Just for Feet overstated income in 1996 by $730,000, in 1997 by $3 million, and in 1998 by $5.3 million, court papers said.

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