Massachusetts’ top securities regulator said Monday that he has “extremely troubling” evidence that Credit Suisse First Boston suggested to prospective clients, including at least one Silicon Valley firm, that they would receive more favorable stock ratings if they picked Credit Suisse as their banker.
William Galvin, the Massachusetts secretary of state, cited confidential marketing documents from Credit Suisse’s July 1999 pitch to underwrite the initial public offering of software company Virata, then based in Santa Clara. According to those documents, Credit Suisse bankers showed a graph to Virata executives that suggested Credit Suisse analysts did not downgrade ratings of stocks as often as competitors when a company didn’t meet analysts’ expectations or issued bad news.
Credit Suisse, a top underwriter of technology IPOs, won Virata’s business. The bank also underwrote the company’s secondary offering and later advised it on a 2001 merger.
In another case, Credit Suisse investment banker Chris Legg sent an e-mail in March 2001 to Frank Quattrone, the Silicon Valley-based head of the firm’s technology group, informing 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.
Credit Suisse’s analyst covering Research in Motion had left the firm. When a new analyst picked up coverage several weeks later, Credit Suisse restored Research in Motion’s “buy” rating.
Galvin called the evidence the equivalent of a “smoking gun,” implicating Credit Suisse in a scheme that could lead to criminal charges. He has referred his findings to New York State Attorney General Eliot Spitzer. Spitzer is leading a coalition of about 40 state securities regulators investigating Wall Street research practices.
Quattrone referred questions to Credit Suisse corporate headquarters.
In a prepared statement, Credit Suisse said it welcomed “the participation by Mr. Galvin in the new coalition of state and federal regulators who are trying to move these issues forward toward constructive resolution to restore investor confidence.”
The company also said it is “very confident that after examining the facts, the New York attorney general will determine that a criminal proceeding is not warranted against the firm and its employees.”
Research in Motion and GlobespanVirata, the successor company to Virata, didn’t return calls seeking comment.
In an appearance Monday on CNBC, Galvin said the e-mail addressed to Quattrone “directly relates the investment-banking business that was done by this firm with analysis that they were going to provide.”
According to the marketing documents, Credit Suisse told Virata that it “stands by its clients.” As evidence, the investment bankers showed Virata how its analyst had given Pilot Network Services, a now-defunct Alameda Web-hosting firm, a “buy” rating after Credit Suisse took the company public in 1998.
The crucial selling point, the bankers told Virata, was that Credit Suisse retained its favorable rating on Pilot stock even though Morgan Stanley and Goldman Sachs, two other banks involved in the Pilot IPO, downgraded their recommendations after Pilot posted disappointing earnings and stock-price declines.
In addition to the securities probes, Credit Suisse is facing business problems amid the continued slump on Wall Street. CNBC reported Monday that Credit Suisse within the next two weeks is expected to cut about 20 percent of jobs in its investment-banking unit and at least 10 percent of the jobs in its equities division.
And Credit Suisse’s investment-banking chief, Adebayo Ogunlesi, is asking bankers to cancel their employment contracts.
Ogunlesi, speaking last week to managing directors in New York, said he planned to ask everyone in the investment-banking division who had contracts to “rip them up,” sources said. Shares of parent Credit Suisse Group have slumped by almost a third in the past week amid losses in investment banking and insurance and concern that the company’s credit rating might be cut.