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E-Mails Byte Analysts

Wall Street workers made tons of money by slanting research

Apr 30, 2003 | AP

Court documents filed Monday depict a frantic world of money and influence in which Wall Street analysts slanted stock research reports to benefit their firms' investment banking business often reaping rewards for themselves in the process.

While some analysts expressed frustration about pressures on their research, many were generously compensated for tailoring their reports to suit the needs of banking interests, according to documents released Monday as part of the $1.4 billion Wall Street settlement.

E-mail excerpts included in lawsuits filed by the Securities and Exchange Commission portray an industrywide pattern of abuses, financial incentives and pressures that sometimes led analysts to publish falsely optimistic reports.

At Lehman Brothers Inc., which agreed to pay $80 million in fines and penalties, at least six senior research analysts had employment contracts that directly linked their compensation to investment banking revenues generated by companies they covered.

Multimillion-dollar bonuses often dwarfed base salaries.

UBS Warburg LLC, which also agreed to pay $80 million, encouraged research analysts to participate in banking, and at least six analysts in its PaineWebber unit were explicitly guaranteed "investment banking bonuses," the SEC complaint said.

At Goldman Sachs, which agreed to pay $110 million, analysts worked with bankers to "pitch" clients.

When a Goldman Sachs analyst was asked to list his three most important goals for 2000, according to court papers, he replied:

"1. Get more investment banking revenue. 2. Get more investment banking revenue. 3. Get more investment banking revenue."

At Merrill Lynch Inc., which agreed to pay $200 million, the influence of bankers often determined whether analysts would provide research coverage for a stock and how they would rate it.

While doing the initial research on Inc., a junior analyst at Merrill Lynch complained there was "no reason to own" the stock, and retail investors might lose their retirement "because we don't want (GoTo's chief financial officer) to be mad at us." Former Merrill Lynch analyst Henry Blodget agreed to pay $4 million under a separate agreement with regulators to settle charges he publicly touted stocks while privately deriding them.

One e-mail exchange illustrated how research could help attract or maintain banking business. A Lehman analyst discussed his plans to give a "buy" rating on Internet consultant Razorfish Inc. because "they are a banking client."

An institutional investor responded by e-mail: "I understand, business is business. But I feel bad for those naive investors who assume that sell-side analysts are objective!"

The Lehman analyst replied that while ratings and price targets were "fairly meaningless the 'little guy' who isn't smart about the nuances may get misled, such is the nature of my business."

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