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CSFB E-Mails Link IPO Shares, Banking Business

Oct 22, 2002 | The Washington Post

The chief financial officer of a California technology company was very specific in a February 2000 e-mail when he described to Credit Suisse First Boston Corp. what it needed to do to get his company's investment banking business.

ECompanies CFO Andrew Greenebaum requested, among other things, a personal introduction to the CSFB broker who cut favored clients into hard-to-get, often lucrative initial public offering shares. Greenebaum wrote that he wanted "bigger allocations" of "hot deals," according to e-mails released today by Massachusetts regulators. Greenebaum wrote that he also welcomed the suggestions that CSFB make investments of $1 million to $3 million to help eCompanies justify its stock price.

Two weeks later, Greenebaum was not happy with the response from Frank Quattrone, the head of the firm's technology banking department. "Except for item #5 [the introduction to Michael Grunwald, the influential CSFB broker] there's been no follow-up from anyone," he wrote on Feb. 27.

A contrite Quattrone responded: "At least we got the most important one done! Sorry about the slow follow-up lots of live deals and last week was year end bonuses, the time all investment banks grind to a halt. We will try to do better."

These e-mails, and dozens more, were released today as part of a civil lawsuit filed by Massachusetts Secretary of State William F. Galvin against CSFB, a unit of Zurich-based Credit Suisse Group. Galvin, the state's top securities regulator, claims that the firm used fraudulently inflated stock recommendations to generate lucrative banking business and rewarded executives who steered business its way with valuable IPO shares.

In a statement, CSFB said the allegations "are riddled with misleading statements and inaccuracies. Unlike other regulators, Secretary Galvin's office did not interview or take testimony from even a single current CSFB employee. Further his office repeatedly refused to allow CSFB to provide relevant information about the situations referenced in the emails. Instead his office has selectively taken a handful of statements out of context from among millions of pages of documents that CSFB provided to his office."

ECompanies was a technology incubator that helped start-up firms get funding. Officials there could not be reached for comment. The company never went public, according to Massachusetts officials.

The Massachusetts lawsuit comes as a task force of state, federal and industry securities regulators continues to work toward a common reform plan that would attempt to close the multiple probes that have embarrassed Wall Street's toniest firms and eroded investor confidence in the market.

New York Attorney General Eliot Spitzer, who sparked many of the current probes with his aggressive investigation into Merrill Lynch & Co., has also considered taking unilateral action against the Salomon Smith Barney unit of Citigroup Inc. Officials close to Spitzer say the attorney general may still pursue an enforcement cast against Salomon, or others, but will probably wait until sweeping reforms are agreed upon by the coalition.

"Our first priority is the global settlement," an official in Spitzer's office said. "First we get world peace and set new standards and practices going forward; then we go back and look at behavior over the last three years and see if there aren't criminal or civil cases to be made."

Unlike officials in Spitzer's office, who privately praised Galvin's effort, many federal regulators expressed frustration at Massachusetts's decision to act on its own. An official at the Securities and Exchange Commission, who requested anonymity, said the lawsuit "would not be helpful" in coming up with an industry-wide reform plan.

An industry regulator called the lawsuit "political grandstanding" on Galvin's part.

In an interview Galvin said he acted because federal regulators and Congress had repeatedly failed to enact tough reforms. And he suggested that talks in Washington about a "global settlement" could wind up letting Wall Street off too easily. "I don't know what 'global settlement' means," he said. "The only discussions I'm aware of have revolved around making structural changes prospectively. They haven't included discussions regarding enforcement actions."

Galvin added: "We acted because the SEC has failed to act. The only momentum in this process has been generated by public disclosures and state actions. If there is going to be progress toward permanent change in the marketplace, I think it is going to be because of state actions."

Galvin decided to press ahead even after CSFB's global general counsel, Gary G. Lynch, implored him not to in a letter released to some media outlets Sunday night. Lynch said that if Galvin decided to go forward it could "undermine the efforts of the broad coalition of state and federal regulators working expeditiously to achieve industry-wide reform to enhance analyst independence."

Lynch said his firm has been working "intensively" with the coalition and was willing to "take whatever steps necessary," including a proposal that would "separate research analysts from investment-banking activities." Lynch added that a global settlement could come as soon as "the next few weeks."

The Massachusetts lawsuit, which could take months to adjudicate, asks that CSFB pay a $2 million fine and have its license censured, suspended or revoked. It also calls for the creation of an independent research arm, "CSFB Research," that would be funded by Credit Suisse. The proposal also includes many other suggestion to further ensure that bankers have no influence over research analysts. The proposal would allow CSFB to petition the state to cancel provisions found to conflict with any new rules enacted by federal regulators.

In many ways, the 80 pages worth of internal e-mails released by Galvin's office today echo embarrassing internal Merrill Lynch communications released by Spitzer in the spring and may offer a window into Wall Street's operations.

In addition to the note from Greenebaum seeking hot IPO shares and reminding Quattrone that he had mentioned the investment-banking firm "can directly invest up to anywhere from $1-$3 million in deals to help justify valuations etc.," the documents include memos indicating close ties between investment banking and research.

One memo from Quattrone was to the technology group, including analysts, seeking information on investment-banking deals everyone had worked on so he could figure out their compensation. But in its statement, CSFB denied that compensation for analysts was tied to specific investment-banking deals. It said the analysts were "compensated based upon a broad array of criteria, including the quality and accuracy of their research and the extent to which they contributed to banking and trading revenue, but their pay was never linked to specific investment banking transactions."

Some internal e-mails feature CSFB bankers and analysts threatening to drop coverage of a firm unless they are selected as lead underwriters of stock offerings the firms were contemplating. In an e-mail on March 8, a CSFB official noted that Research in Motion, makers of the BlackBerry handheld e-mail device, had paid CSFB "the extra $1.8 million we asked for" and requested that the company be returned to "most favored nation status," including full research coverage.

In an e-mail from March 2001, a CSFB research official warned a company analyst against reducing an earnings estimate for America Online Inc. "I would NOT lower numbers on AOL, even though they can't make them," the official, Laura Martin, wrote to analyst Jamie Kiggen. "We get paid to add value."

In November 2000, CSFB analyst Kevin McCarthy complained bitterly about having to write positive reports on a device server company called Lantronix, an investment-banking client of Donaldson, Lufkin, Jenrette, which CSFB had acquired.

"I put my reputation on the line to sell this piece of crap," McCarthy wrote, arguing to drop coverage. "I promised the company a report and we wrote one. This deal was an embarrassment to me and the firm and I wasted a lot of bullets to get it done."

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