Massachusetts securities regulators have uncovered evidence that Credit Suisse First Boston may have illegally misled investors with its research and channeled shares of initial public offerings to friends of its investment banking business, sources familiar with the matter said Thursday.
The findings have been turned over to New York Attorney General Elliot Spitzer, whose state laws have more teeth than other state laws and federal statutes covering large Wall Street firms. The 1921 law known as the Martin Act allows for convictions without proving criminal intent and without any sales or purchases of securities.
The Massachusetts regulators do not explicitly recommend criminal charges against CSFB, but say the company’s activities may have violated the law, two sources said.
Juanita Scarlett, a spokeswoman for the New York Attorney General’s office, confirmed the receipt of a letter and information from Massachusetts Secretary of State William’s Galvin’s office, but declined to discuss specifics.
“We need to consult with the Massachusetts authorities and review evidence before we make a decision on how to proceed,” she said.
A spokesman for Galvin’s office, which has been collecting e-mails between CSFB analysts, had no comment.
CSFB said in a statement that it “will cooperate fully with any examination” by Spitzer. CSFB said it was confident that Spitzer “will determine that a criminal proceeding is not warranted here.” The statement added that the bank has adoped reforms urged by Spitzer for all financial institutions to promote objective research.
The evidence revealed Thursday includes one internal CSFB e-mail, which came to light earlier Thursday, describing a technique called the “Agilent Two-Step,” a term for the practice of rating a stock higher than it deserved in order avoid harming other business for the firm.
In an Oct. 12, 2000 e-mail, analyst Tim Mahon describes the technique in which the company maintains an official ranking on the company but “verbally everyone knows your position.”
The document was collected by Massachusetts regulators and obtained by The Associated Press on Thursday. It was first described in Thursday’s editions of USA Today and The Boston Globe.
Galvin called the practice “a form of corruption.”
“They show a serious case of deceit,” Galvin said Thursday. “For us in Massachusetts, using our standards, that’s a breach of fiduciary duty.”
In an e-mail sent Oct. 11, 2000, CSFB analyst Bhavin Shah wrote to Elliott Rogers, the company’s deputy head of technology research, saying he faced “tough decisions” about how to initially rate two companies, United Microelectronics Corp. of Taiwan and Chartered Semiconductor Manufacturing Ltd. of Singapore.
In the e-mail, also sent to Mahon, Shah details several concerns about the company business practices but says they are “clearly the largest revenue accounts of us in Asia.”
“I am debating if the first note out … of black out could be with neutral rating,” Shah wrote. “Wondering how to approach this based on banking sensitivities.”
Mahon, not Rogers, wrote back: “Suggest you ask Elliot about the ‘Agilent Two-Step.’ That’s where in writing you have a buy rating (like we do on CHRT, and thank God it’s not a Strong Buy) but verbally everyone knows your position.” CHRT is the stock symbol for Chartered Semiconductor.
Agilent, previously a subsidiary of Hewlett-Packard, went public in November 1999 at $30 per share, with Rogers giving it a “buy” rating, according to USA Today. The shares closed Thursday at $14.07 on the New York Stock Exchange.
“In the two years since this e-mail was written, CSFB has enacted systemic changes to strengthen analyst independence,” CSFB spokeswoman Victoria Harmon said Thursday. She said the company also continued to work closely with regulators and government officials.
Rogers and Shah have left the company. A woman who answered the phone at Mahon’s office Thursday said he was out of the country and unreachable.
One source confirmed that the information passed to Spitzer’s office suggests CSFB may also have violated the law by channeling shares of initial public offerings to friends of its investment banking business. CSFB has agreed to pay $100 million to resolve such allegations from regulators.
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