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Wednesday, April 30, 2003

Sleaze to the max

The settlement announced this week between prosecutors and the nation's big investment firms portrays the firms as lowlife thieves in suits. Ten firms and two big-shot analysts agreed to pay $1.4 billion in fines, restitution and other payments, but given what they and the rest of the Wall Street crowd have apparently been caught doing, that's getting off lightly.

The newly revealed details of the widespread stealing and bribery that appear to have been taking place in our securities markets are stunning. Many observers suspected that some Wall Street firms were knowingly advising investors to buy stocks of companies that the Wall Street firms knew were in trouble, in order to keep the executives at the troubled companies happy. This in turn led those executives to use the same Wall Street firms for investment banking services, in which the Wall Street firms make a mint by acting as go-betweens between the securities markets and the companies. According to prosecutors, those suspicions were true.

But the level of corruption within the investment firms was never even hinted at until this week, when it was revealed that they were bribing each other's analysts to tout stocks that the bribing party was doing the investment banking for!

Stephen Laboton of The New York Times explained some of what has been disclosed:

The Securities and Exchange Commission, state prosecutors and market regulators accused three firms in particular — Citigroup's Salomon Smith Barney, Merrill Lynch, and Credit Suisse First Boston — of fraud. But the thousands of pages of internal e-mail messages and other evidence that regulators made public today painted a picture up and down Wall Street of an industry rife with conflicts of interest during the height of the Internet and telecommunications bubble that burst three years ago.

At firm after firm, according to prosecutors, analysts wittingly duped investors to curry favor with corporate clients. Investment houses received secret payments from companies they gave strong recommendations to buy. And for top executives whose companies were clients, stock underwriters offered special access to hot initial public offerings....

[T]he regulators found fault with every major bank on Wall Street.

In addition to the three firms accused of fraud, five others — Bear Stearns, Goldman, Sachs, Lehman Brothers, Piper Jaffray and UBS Warburg — were accused of making unwarranted or exaggerated claims about the companies they analyzed. UBS Warburg and Piper Jaffray, were accused of receiving payments for research without disclosing such payments.

Times reporter Gretchen Morgenson filled in some of the particulars of the bribery:
In a newly disclosed tactic, Morgan Stanley and four other brokerage firms paid rivals that agreed to publish positive reports on companies whose shares Morgan and others issued to the public. This practice made it appear that a throng of believers were recommending these companies' shares.

From 1999 through 2001, for example, Morgan Stanley paid about $2.7 million to approximately 25 other investment banks for these so-called research guarantees, regulators said. Nevertheless, the firm boasted in its annual report to shareholders that it had come through investigations of analyst conflicts of interest with its "reputation for integrity" maintained.

Among the firms receiving payments for their bullish research on companies whose offerings they did not manage were UBS Warburg and U.S. Bancorp Piper Jaffray. UBS received $213,000 and Piper Jaffray, more than $1.8 million.

What jumps off the page in these documents is the Wall Street firms' disregard for the individual investor in pursuit of personal benefit.

One comment made by a Bear, Stearns analyst is telling. While participating in a conference call by SonicWall, an Internet company whose shares Bear, Stearns had sold to the public, the analyst told a colleague that he was trying to make the company look good with his questions. A few moments later, he said, "we got paid for this," adding, "and I am going to Cancun tomorrow b/c of them."

A couple of guys have been banned from the industry in this latest wave of prosecution, but that won't be enough to heal the sickness that appears to be permeating Wall Street. Here's hoping that jail sentences and huge court judgments for investors are not far behind. Yes, let's hope that those {sarcasm}horrible, horrible trial lawyers who are ruining this country{/sarcasm} put an even more serious dent in the wallets of the more egregious dens of iniquity.

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