New York Attorney General Eliot Spitzer has widened the investigation into a number of Wall Street analysts.
He has now ordered several top investment firms to hand over documents that could reveal conflicts of interest between analysts and investment bankers.
The Financial Times named Morgan Stanley and Credit Suisse First Boston, and the Wall Street Journal reported Goldman Sachs, Lehman Bros, UBS Paine Webber and Salomon Smith Barney as targets of the investigation. More subpoenas are expected, according to reports.
A day earlier, Spitzer obtained a court order that required Merrill Lynch, the world’s biggest brokerage company, to disclose to customers its relationship with banking clients and to explain its stock ratings.
Spitzer said that in the 10-month long investigation, email correspondence and other communications obtained by the court showed that analysts were encouraged by other investment bankers employed by Merrill Lynch to mislead investors.
Merrill Lynch executives insisted that there is no basis for the allegations and stated that “his conclusions are just plain wrong”.
Rob Enderle, an analyst at Giga Information Group, said: “[Merrill Lynch] should put in place policies that will restrict this behaviour going forward and reduce a practice that put individual investors at excessive and unwarranted risk.”
In the short term the litigation will reduce the trust that investors have in firms like Merrill Lynch, according to Enderle. “This should put an additional drag on the stock market as these investors look for more trusted places to put their money,” he said.
The Attorney General has pledged to bring criminal charges against big brokerages for hiding bad news from investors about stocks those firms were also underwriting.
“The mission here is to craft a settlement that will eradicate the conflicts of interest that we believe are endemic,” explained Spitzer.
The firms have recently come under fire from regulators and investors for recommending stocks that they knew were probably bad investments.