Lawmakers intensified their scrutiny of Wall Street on Wednesday by expanding their investigation into potential conflicts of interest and back-scratching at Goldman Sachs and Credit Suisse First Boston.
The House Financial Services Committee, which has already subpoenaed records from Salomon Smith Barney, took a more aggressive stance with Goldman Sachs and Credit Suisse First Boston. The committee asked for information about 14 of Goldman Sachs’ investment-banking clients and 15 clients of Credit Suisse.
The committee has been trying to determine whether investment banks gave shares in initial public offerings to executives in other companies to drum up investment-banking business. Shares in these IPOs often jumped in the first day of trading, giving investors a quick way to make a profit.
But in the letters to Goldman Sachs and Credit Suisse, the committee also requested information about the stock analysts who followed the 29 companies, how the analysts rated those companies and whether the analysts’ pay was linked to investment-banking business.
”It’s about time,” says Leslie Boni, a finance professor at the University of New Mexico, who has studied these issues extensively.
While the Securities and Exchange Commission recently passed rules to curb conflicts between analysts and investment bankers, Boni says, ”The rules simply don’t eliminate the potential conflicts of interest between investment bankers and research.”
Specifically, the rules don’t cover allocations of IPO shares. ”They probably didn’t address it because people didn’t imagine it could be so bad,” she says.
Last week, the committee released documents showing that Salomon gave 1 million shares in hot IPOs to Bernie Ebbers, the former chief executive of WorldCom, which was one of Salomon’s biggest investment-banking clients.
”I was horrified,” Boni says.
Wednesday, the committee asked both Goldman Sachs and Credit Suisse for information about their dealings with Enron and Global Crossing, both companies are now in bankruptcy reorganization and under investigation by the Justice Department.
Also on Goldman’s list: once-highflying Internet firms such as iVillage and PlanetRx.com. Credit Suisse’s list includes Commerce One and Handspring.
”Insider allocation of initial public offering shares unfairly dilutes the value of the stock for the small investor,” says Rep. Michael Oxley, R-Ohio. ”Free and fair markets, not favoritism or cronyism, are what have made America the premier place to invest.”
Credit Suisse First Boston said they would continue to cooperate with all investigations. A call to Goldman Sachs was not returned.