E-mail messages of U.S. Bancorp Piper Jaffray stock analysts indicate that conflicts of interest may have tainted their stock recommendations. The messages turned up in an investigation of the Minneapolis-based securities firm, according to the official overseeing the probe.
Washington state officials are leading an inquiry into allegations that Piper analysts used bullish recommendations to attract lucrative investment-banking deals such as underwriting stock offerings and advising mergers and acquisitions. Critics of the securities industry allege that the practice was widespread at top firms during the late 1990s bull market and that analysts went along because they earned fat bonuses for helping land business.
Piper is one of about a dozen large investment-banking firms being investigated by regulators from 42 states. The investigators want to know whether the firms defrauded average investors by touting stocks during the market bubble in 1999 and 2000 that later lost most or all of their value.
Piper was in the thick of that business, participating in 131 initial public stock offerings that raised nearly $10 billion from 1999 through 2001.
The Piper investigation is starting to bear fruit, said Deborah Bortner, director of securities for Washington state. “We’ve found some e-mails that look suspicious,” she said. However, investigators are proceeding cautiously to make sure that the messages are not taken out of context. “I can’t say we’re definitively going to do something or not.”
Piper spokeswoman Erin Freeman said only that the firm is cooperating fully with the investigation.
Investigators also are talking to employees and looking at documents relating to analyst compensation, Bortner said. The investigation started in May and now involves half of Bortner’s 20-member investigation staff, as well as investigators from Minnesota, Iowa and Wisconsin.
The investigation centers on stock offerings that Piper underwrote, but also looks at whether the firm didn’t do business with some companies because of conflicts of interest.
Investigators have been hampered because Piper has not turned over all the requested e-mail; investigators are trying to find out why some are missing, Bortner said. The New York Times reported last summer that some Wall Street firms had told the SEC that they had not retained e-mail messages even though federal law requires such messages to be kept for three years if they relate to a firm’s overall business.
“Part of our issue is, when did you keep those as e-mail, when did these e-mails disappear?” Bortner said. Investigators also are dickering with Piper over requests for documents. Some must be produced when regulators ask; others can be protected.
“You don’t ask for something and they fall all over themselves to give you what you want,” Bortner said. “We asked for a lot of documents and we didn’t get everything we wanted and it hasn’t been a smooth process, but that’s not to say that they’re trying to hide something that they don’t have the right to do.”
E-mail messages proved to be key in New York state’s investigation of Wall Street titan Merrill Lynch & Co. New York found e-mail that showed Merrill Lynch analysts privately disparaged companies they recommended that investors buy. The firm settled by paying a $100 million fine and adopting policies to insulate analysts from investment banking. That investigation prompted the state regulators, the U.S. Securities and Exchange Commission and major stock exchanges to launch their own investigations.
Piper already has been disciplined for overstepping the imaginary line between investment banking and research.
In June, the firm and one of its senior investment bankers were fined $300,000 by the National Association of Securities Dealers for threatening to drop analyst coverage of New York-based cancer drug maker Antigenics after the company hired a rival firm for lucrative investment banking business.
While the fine is small potatoes for a firm that earned $59.2 million in the equity capital markets business last year, it made Piper just the second major firm to be penalized by regulators after more than a year of investigations into conflicts of interest on Wall Street.
The Antigenics case also energized Bortner’s investigation. “Piper was identified because of the Antigenics case, but we wondered whether that was the tip of the iceberg or was that the iceberg,” she said.
Bortner said there is no timeline for completing the investigation, though state and federal regulators are trying to agree on a way to end all the investigations quickly and comprehensively. They were scheduled to discuss a global resolution Thursday in Washington, D.C.
“We don’t really believe it’s in the best interest at this point in time to really go off on our own and we don’t intend to do so,” Bortner said. “We have relationships with the other regulators that it’s important that we continue.”