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Regulators Accuse CSFB of Misleading Investors

Oct 22, 2002 | San Jose Mercury News

Massachusetts securities regulators alleged Monday that Credit Suisse First Boston's technology researchers misled investors by not telling the truth about companies including some in the Bay Area that the firm wanted as investment-banking clients.

The allegations were contained in a civil complaint filed Monday by Massachusetts Secretary of the Commonwealth William Galvin. It represents the latest in a string of efforts by regulators to crack down on some Wall Street practices that have come under question in the wake of the tech boom's collapse.

The technology researchers at Credit Suisse formerly reported to Palo Alto investment banker Frank Quattrone, who was not named as a respondent in the complaint, but whose e-mails were cited as evidence.

Credit Suisse said the complaint is ``riddled with misleading statements and inaccuracies'' and accused Galvin's office of taking the exhibited documents out of context.

Galvin is seeking a $1.9 million fine in the case and wants the firm to further separate its research and banking divisions to avoid any conflict of interest.

Analysts are supposed to give objective advice about whether certain companies' stock is a good investment. But during the tech boom, critics say some research analysts were pressured to issue positive ratings of companies to lure the companies' business to the analysts' investment bank. In May, Merrill Lynch agreed to pay New York and other state regulators $100 million to settle similar allegations.

The complaint alleges that during the technology boom in the late 1990s and early 2000, Credit Suisse let its technology investment bankers influence analysts by setting their pay or intruding into the research process to write positive reports on companies the bankers were courting for such business.

Credit Suisse apparently was ``not only . . . happy to give bad advice, but took pleasure in it'' and ``mocked investors and regulators,'' Galvin said.

The complaint contains partial transcripts of an interview with an analyst who said he got in trouble with Quattrone for not alerting Cadence Design Systems that it was about to be downgraded. Galvin alleged that such interference put pressure on analysts to ``give a more favorable rating and to `sugarcoat' the language to appease'' the company.

Credit Suisse denied that Quattrone's group secretly controlled researchers, adding that its analysts had ``more autonomy than was common in the industry, including the authority to veto proposed investment banking deals.''

The complaint includes some e-mails Galvin said implied Credit Suisse used threats to withhold research coverage of a client company as a tool to win further business.

One is a Jan. 26, 2000, e-mail from Quattrone in which he tells a colleague that they should demand a lead position on a banking deal for Aether Systems, or else ``drop coverage.''

Another is a March 2001 e-mail from Credit Suisse investment banker Chris Legg to Quattrone telling him that Research in Motion, the Canadian maker of Blackberry pagers, had paid $1.8 million it owed for Credit Suisse banking services. ``Now that the fee issue is behind us, I would ask that we return them to `most favored nation' status,'' Legg wrote.

A Credit Suisse spokeswoman said Credit Suisse did not get the lead position on Aether but still covered it with a ``buy'' recommendation for at least 22 more months. And coverage of Research in Motion was only dropped temporarily, she said, because the main analyst left the firm.

Another e-mail features tech researcher Kevin McCarthy complaining to his boss that he was pressured by investment bankers to help them sell investors on Lantronix, a company whose stock deal performed poorly. ``This deal was an embarrassment to me,'' McCarthy wrote.

The complaint proposes to force Credit Suisse to create a separate division for investment research and to cease paying researchers in any way for finding potential investment-banking clients.

In filing the complaint, Massachusetts broke from a group of states and regulators that have been investigating similar allegations and trying to settle with Credit Suisse for $100 million. The $1.9 million fine requested by Massachusetts is the portion it would have gotten as its share of a $100 million settlement.

Credit Suisse has maintained that it has made substantial changes to its tech-research department, including no longer having researchers report to Quattrone and no longer tying their pay directly to investment banking deals.


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