The crackdown on conflicts of interest in Wall Street research has expanded to consider the role played by bank executives who supervised analysts.
Kevin McCaffrey, former head of US equities research at Citigroup’s Salomon Smith Barney unit, has been told that he is being investigated by the National Association of Securities Dealers.
Mr McCaffrey helped supervise Jack Grubman, the former Salomon telecommunications analyst who has agreed to a $15m fine and a ban from the securities industry for publishing over-bullish research to gain business.
The NASD told Mr McCaffrey he was being investigated for violations including failure to properly supervise.
Securities lawyers said the action raised the prospect that other research heads could be investigated. Ron Geffner, a former SEC enforcement lawyer ow a partner with Sadis & Goldberg, said: “I would anticipate that the regulatory bodies are going to treat all the investment banks in an identical manner.”
The NASD web site said Mr McCaffrey had denied violating its rules. A call to Mr McCaffrey was referred to Citigroup, which eclined to comment. The NASD also declined.
Mr McCaffrey’s name surfaced in a civil lawsuit filed last September by Eliot Spitzer, the New York attorney-general, that offered a devastating portrait of the conflicts of interest at Salomon’s equity research unit.
Mr Spitzer claimed Salomon’s analysts were encouraged to check with investment bankers before writing their reports, and that their compensation was tied directly to banking revenues. He noted that of the 1,179 companies covered by Salomon in 2001, not one was deemed a “sell”.
At one point, Mr Grubman wrote to complain to Mr McCaffrey: “Most of our banking clients are going to zero and you know I wanted to downgrade them months ago but I got huge pushback from banking.
“I wonder of what use bankers are if all they can depend on to get business is analysts who recommend their banking clients.”