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Thomas Weisel Is Set to Settle With Regulators on Research

Holdout in Wall Street's Accord Will Pay as Much as $15 Million

Feb 12, 2003 | The Wall Street Journal

The lone holdout in the $1.4 billion Wall Street stock-research-abuses settlement is finally close to a deal.

Thomas Weisel Partners LLC, a San Francisco merchant bank that came of age in the waning days of the stock-market boom, is expected to announce as soon as Wednesday that it has settled with state and federal regulators over alleged conflicts between investment banking and stock research, according to people close to the talks.

Under the terms being discussed, Weisel will pay as much as $15 million for its part of the settlement, ending a two-month standoff between Weisel and regulators. Although a final deal is believed to be close, the negotiations still could unravel and settlement talks could collapse.

Chief Executive Thomas Weisel has said that if the firm had to pay the fine that regulators initially requested $60 million the company would be forced to shut down, throwing hundreds of people out of work at a time when the Silicon Valley economy already is on the ropes.

The alternative for Weisel was a potential court fight, a prospect that was dreaded by the 11 other banks and brokerage firms in the settlement, which were eager to put last year's investigations behind them, and posed possible legal risks for Weisel, which could have faced uncomfortable disclosures about its stock-research practices during the boom.

That a settlement appears imminent comes as a relief to the firm and its 61-year-old chief, who essentially bet his company in December when he refused regulators their initial request, risking their ire.

With a dwindling merger-deals market and the costs of employing 600 people in expensive office space, Mr. Weisel said holding out for a lower fine was a risk he felt he had to take.

"I would rather not be in this position," said the executive, who recently co-wrote a biography of himself that hits book shelves Friday. "But there's a certain crossover point [at which] you're willing to settle to get it behind you, versus going through what will most probably be a couple of years of litigation."

The Weisel camp's argument basically was that as a result of its small size, the firm shouldn't have to cough up anything close to what other, bigger companies ultimately paid. Those fines ranged from $400 million for Citigroup Inc., owner of Salomon Smith Barney, to $32.5 million for U.S. Bancorp's Piper Jaffray unit.

Still, the likely accord comes despite suggestions from regulators that during and even after the technology boom of the late 1990s, Weisel executives encouraged analysts to hype companies as a way to shore up investment-banking deals, according to people familiar with the situation.

Mr. Weisel declined to comment on details of the investigation, other than to say that Thomas Weisel Partners analysts have always enjoyed complete independence from banking concerns. A spokeswoman for the firm also declined to discuss the details.

Mr. Weisel started the firm in January 1999 after he quit NationsBanc Montgomery Securities, taking dozens of people, from his top banking lieutenants to a cleaning lady, with him. It was that group, along with 22 venture-capital firms, that pooled $65 million to start Weisel.

The company grew rapidly, as tech banking deals initially flooded in. At its peak in 2001, Weisel was valued at $2 billion; its staff grew as large as 800.

People who worked at the company say a priority for the bankers was to make sure that companies that Weisel was pitching for underwriting business were matched with analysts who were willing to be optimistic about them.

Alan Rifkin, an analyst in Weisel's consumer group for much of 1999, said the firm's entire focus was on using research as a tool to help investment banking, the same issue that later would lead all of Wall Street's biggest firms to settle with regulators.

"The entire research department was focused on securing private placements and doing banking business," says Mr. Rifkin, who was laid off from Weisel when his group was disbanded and now works at Lehman Brothers Holdings Inc.

Mr. Rifkin said the banking mandate often conflicted with his own. "There were a lot of deals coming down the pipeline that I didn't want to be involved with," he says, including the initial public offerings of, and, "tiny companies with incredibly high valuations."

Mr. Weisel acknowledges that bringing an optimistic analyst to a pitch meeting with a potential banking client was a typical practice in the firm's early years, as it was at many other Wall Street firms during the boom years.

But he disagrees that analysts were ever coerced into being bullish on companies they disliked. "We never ever had an issue of banking influencing research," he said. "It's part of the DNA here that analysts need to be independent."

While that may be, investigators from the Securities and Exchange Commission clearly have been trying to prove otherwise.

As part of a series of fall meetings with current and former Weisel employees it subpoenaed, the SEC examined Weisel's coverage of the stock Inc., a Santa Monica, Calif., online postage seller.

In 1999, hired the firm's bankers on three separate occasions: to assist with its initial public offering of stock and subsequent follow-on offering, and to write a fairness opinion for a merger with another company.

The stock was covered by Internet analyst Geoffrey Beard, who maintained a "buy" rating on it from shortly after its summer 1999 IPO.

But in the fall of 2000, people familiar with the matter say he sent an e-mail to one of Weisel's research directors suggesting that Weisel drop coverage of because, among other factors, the firm had already won the banking business in connection with the deal.

Weisel's final research report, which carried a "buy" rating, was published in September 2000.

The Internet company's share price has since been halved, and now trades at about $4. Mr. Beard, who left the firm in early 2001, now runs a consulting firm in San Francisco. He wouldn't comment on the details of his coverage of SEC officials also declined to comment.

Another aspect of the SEC inquiry, say these people, is a spring 2001 e-mail from James Linnehan, a telecommunications analyst.

In the e-mail, say these people, another Weisel executive questioned Mr. Linnehan's "buy" rating on the stock of Level 3 Communications Inc., which since that time has dropped to about $5 from more than $20.

The analyst, say the people, replied that there was some upside to the stock, but he added that some clients might want to sell it and that he was planning to downgrade it.

Mr. Linnehan eventually did downgrade the company's shares, to a "market-perform" rating, in June 2001, at which time the stock fell below $15. Mr. Linnehan took a buyout at the end of 2001 and is now working as a consultant in market-information services. He wouldn't comment on the details of his coverage decisions.

Even if Mr. Weisel now puts these questions behind him, he still will be forced to contend with a brutal business environment.

Just one IPO has come to market since December, and the stock market continues to sag on fears of war with Iraq.

Mr. Weisel says the disappearance of competitors such as Robertson Stephens, which was purchased several years ago by FleetBoston Financial Corp. but shuttered last summer, could give Weisel an opening.

"Our penetration in terms of investment-banking business has gone straight up," he says. "We're being favored by having another year or two in business, and [companies have] gotten to know us."

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