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E-mails Hint of CSFB Conflict

Nov 27, 2002 | The Boston Globe

A day after Credit Suisse First Boston Corp. sought to dismiss as false the fraud charges brought against it by Massachusetts securities regulators last month, investigators released a new series of e-mails that appeared to provide further evidence that research analysis at the Wall Street firm was controlled by investment bankers.

In an e-mail exchange on March 7, 2001, Jamie Kiggen, an analyst at the time, alerted Frank Quattrone, Credit Suisse's powerful high-tech investment banking chief, and other executives to a disappointing earnings forecast from Internet giant Yahoo Inc.

Kiggen wrote that he wanted to lower his rating on the stock to ''sell'' a highly unusual move in those days, but he was asking permission first.

Calling the first-quarter earnings preannouncement ''a complete disaster,'' Kiggen told his bosses Yahoo shares could ultimately lose more than half their value at the time, and fall below $10. ''Should probably be at a Sell rating (am at Hold now), but would like your input,'' he said in the e-mail. Copies of the correspondence were obtained from the Massachusetts Securities Division.

A response from Bill Brady, another executive in the investment banking group, urged Kiggen not to change his rating. ''Would appreciate it if you could keep it at a hold,'' he wrote, while ''still highlighting all of the negatives'' in the written report.

The exchange offers a rare behind-the-scenes look at a fact of life that sophisticated investors always understood but that regulators say was less known to small investors: Sell ratings rarely saw the light of day on Wall Street before this year's brouhaha over the conflicts in stock research departments. Even when companies announced bad news, analysts rarely lowered their ratings to ''sell,'' for fear of angering the companies and losing future investment banking business with them. New York Attorney General Eliot Spitzer has led the charge against research conflicts, bringing high-profile cases this year against Merrill Lynch & Co., Salomon Smith Barney, and Credit Suisse.

Credit Suisse said in its response to the Massachusetts fraud charges that it ''has not engaged in any fraudulent, unethical, or dishonest conduct.'' The company also said that in June of last year, it implemented several changes to improve research independence; analysts no longer report to investment bankers, Credit Suisse said.

But earlier that year, the pressures on analysts appear to have been stiff. Kiggen, in an e-mail response to his banking superiors that same March day, called himself a ''revenue kind of guy,'' saying he would maintain the hold rating so he wouldn't jeopardize potential revenue, or business, with Yahoo. That despite the fact Credit Suisse had no business with Yahoo at the time: ''The wait for revenue from these guys has been awfully long,'' Kiggen wrote.

Even as he agreed to follow orders, Kiggen's e-mail conveys discomfort with the move. He said he'd keep the ''hold'' rating unless he heard more bad news from Yahoo that evening, ''not that the [conference] call wasn't scary enough.'' Further, Kiggen noted that if one of Credit Suisse's rivals won Yahoo's business in the future, ''We obviously will have missed an opportunity to raise firm's research profile and credibility; but I'm sure that won't happen.'' The note was ended with the online shorthand for a wink, a semicolon followed by a closed parenthesis.

Secretary of State William F. Galvin, who oversees the Massachusetts Securities Division, said the e-mails add weight to the division's complaint, which alleges that Credit Suisse permitted a culture of ''investment banking exerting undue influence on the research analyst to give favorable ratings'' to clients or prospective clients.

''Revenue concerns at the company were driving the analysis, and investors were kept in the dark about that,'' Galvin said in an interview yesterday.

In a separate Credit Suisse e-mail obtained from the division yesterday, Quattrone, the technology banking chief, asked analyst Brent Thill on Nov. 6, 2000, about his new coverage of a San Jose, Calif., company, Agile Software Corp.

''What have we extracted from them on banking side to get this coverage?'' Quattrone asked. Credit Suisse said it did not have any business with the firm at the time.

Galvin cited ''belligerence'' in Credit Suisse's response this week to the division's complaint. The firm called the complaint ''riddled with factual mistakes and flatly incorrect descriptions'' The response also said the division's complaint ''reflects a basic misunderstanding of CSFB's business as well as the role that investment banks and research analysts serve in the nation's financial markets.''

The division is looking to force Credit Suisse to separate its research and banking divisions entirely a resolution that would go a step further than the industry appears inclined to accept at this point. The state has been investigating Credit Suisse as part of a multistate effort to probe research conflicts at all the top Wall Street firms, even as New York and federal investigators are looking into the same matters. Massachusetts has joined the so-called ''global settlement'' talks underway in New York, but a separate proceeding continues here as well. A hearing is expected by mid-January.

Galvin said the Wall Street firms so far have balked at truly separating research from their banking efforts. ''The attitude in the securities industry is that these are private matters and they'll be taken care of behind closed doors,'' he said. Of Credit Suisse, he said, ''Their attitude suggests that they don't see anything wrong here.''

Victoria Harmon, a Credit Suisse spokeswoman, said in a statement yesterday, ''CSFB continues to work closely with a broad coalition of state and federal regulators to achieve significant national reforms. We are strongly committed to this ongoing process, which we believe is the best way to achieve effective industrywide reform and help restore investor confidence in the markets.''

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