Feds, DA Probe Stox Analysts Suspected of hyping duds

New York Daily News ^ | 6/28/02 | GREG B. SMITH

[kattracks]

Two new probes of Crook Street are underway.

Federal and local prosecutors are looking into allegations that stock analysts at several brokerage firms deliberately misled investors by hyping stocks they privately felt were dogs, the Daily News has learned.

Manhattan District Attorney Robert Morgenthau and Manhattan U.S. Attorney James Comey have launched separate investigations of Wall Street analysts, say several sources familiar with the matter.

Both probes center on whether analysts violated securities laws by intentionally giving misleading advice, the sources said.

The probes mirror a noncriminal inquiry of Merrill Lynch by New York State Attorney General Eliot Spitzer — who settled the investigation in May after Merrill Lynch agreed to pay $100 million in restitution.

Spitzer's probe found that the Wall Street giant's analysts sent numerous private e-mails that contradicted their public praise of certain high-flying stocks that later crashed and burned.

One Merrill Lynch analyst raved about Excite.com while e-mailing a co-worker that it was a "piece of crap," and another frothed to investors about Infospace while deriding it in e-mails as "a piece of junk."

The damning e-mails undermined the credibility of several high-profile stock pickers, including Henry Blodgett, whose frequent TV appearances made him a star in the analyst world.

Others Free to Prosecute

In reaching a settlement with Merrill Lynch, Spitzer agreed not to pursue criminal charges against its analysts.

But the deal explicitly did not preclude criminal investigations by other prosecutors, and Spitzer — expanding his probe to other brokerage houses — began sharing information with Comey and Morgenthau, said a source familiar with the investigation.

Both prosecutors declined to comment yesterday.

Morgenthau, whose office has been increasingly aggressive in pursuing Wall Street malfeasance, already had begun an inquiry into several high-profile Wall Street analysts before Spitzer's probe hit the headlines, said one source.

The probe focused on the advice given about specific stocks by specific brokers, none of whom worked at Merrill Lynch, a source said. The cases in question usually involved brokers who continued to hype stock after it began to tank, said one source familiar with that investigation.

In the last few months, the district attorney convened a grand jury that has heard testimony from numerous witnesses and compared internal documents — including e-mails — to the analysts' public declarations, two sources said.

"Any statement that is materially misleading, you have a problem," said one source familiar with the probe.

Meanwhile, prosecutors in Comey's securities unit also have started sifting through material discovered by Spitzer, said a source familiar with that probe.

Bigger Investigation

The U.S. attorney's investigation appears to be more far-reaching than Morgenthau's efforts, but in a more preliminary stage, said several sources.

The unit — which is currently prosecuting Sam Waksal in the widening ImClone probe that has implicated Martha Stewart — is considering whether federal securities laws could apply, said one source. It's not clear whether the federal investigation has convened a grand jury to hear evidence.

Comey's spokesman, Marvin Smilon, declined to comment yesterday.

Spitzer's office also is looking into analyst conflicts at brokerage houses other then Merrill Lynch, including Morgan Stanley and Salomon Smith Barney, officials say.

Officials at Morgan Stanley said yesterday they had turned over "a lot" of e-mails to Spitzer and were fully cooperating in the ongoing investigation. A spokeswoman said from what they'd seen, "There was more comfort than concern."

[arete]

Wall Street giant's analysts sent numerous private e-mails that contradicted their public praise of certain high-flying stocks that later crashed and burned.

I'm shocked. Wall Street corrupt? Tell me it ain't so.

Richard W.