Massachusetts securities regulators filed a complaint Monday against Credit Suisse First Boston, seeking a $1.9 million fine and for the company to separate its research and investment banking divisions.
The regulators accused CSFB of “mocking investors” with misleading research. The administrative complaint also charges the bank with investing in new public companies for the sole purpose of “justifying the IPO valuation.”
Secretary of the Commonwealth William Galvin said there could be further action, and some information could be turned over to prosecutors for possible criminal charges. His office has already given evidence to New York Attorney General Eliot Spitzer.
There was no immediate comment by CSFB, which has 21 days to file a response. The company’s general counsel, Gary Lynch, warned in a letter to Massachusetts officials on Sunday that such a proceeding would jeopardize efforts to create new national guidelines by setting up a “state-by-state or ‘patchwork’ approach to securities regulation.”
But Galvin, whose office has collected 400,000 e-mails in its investigation of CSFB, said state action was necessary to jolt the industry and the Securities and Exchange Commission into action.
“We act today because the SEC has failed to act and self-policing has failed to protect the investors of the United States,” said Galvin, speaking surrounded by boxes of evidence and poster boards showing quotes from CSFB e-mails.
The complaint could result in a hearing before an administrative law judge, which Galvin said could last weeks or months and produce more evidence. CSFB could appeal any ruling in the general court system.
The complaint names only CSFB as a respondent, but mentions Frank Quattrone, the high-profile head of investment banking for the company’s technology group.
Quattrone, the complaint states, told analysts to call a company’s management before downgrading a stock, and his group held the threat of a downgrade over the heads of outside companies.
“When it appeared that CSFB was losing a deal to another firm, Quattrone, or his staff, would threaten company managers that CSFB would drop coverage of a stock, unless CSFB was awarded a certain position in an upcoming investment banking deal,” the complaint states.
Some of the evidence had already been disclosed, including an e-mail from an analyst describing a technique called the “Agilent Two-Step,” a term for the practice of rating a stock higher than it deserved to avoid harming other business for the firm.
Other communications included an e-mail from a former CSFB analyst advising a colleague not to lower numbers for AOL Time Warner Inc. “even though they can’t make them,” to avoid angering the company.
CSFB has repeatedly insisted that it has undertaken wide-ranging reforms since those e-mails were sent.
The complaint could complicate other investigations into CSFB, but Galvin denied it was part of a “bureaucratic turf war” and insisted state action was the only way to separate research and investment banking at companies like CSFB.
“The American investor ought to know that the advice they’re getting may be wrong, but at least was made in good faith,” Galvin said.