Like clockwork, the investment public was hit this past month with more stories of lies, greed and manipulation. Once again, the arrogance and selfishness of our country’s largest investment houses have reared their ugly head. Unfortunately, most of these stories have been left off the nightly news programs. Dan, Peter and Tom, the alleged purveyors of truth have decided not to upset their major advertisers and have chosen to ignore these stories. Fear not friends! Your Watchdog has not been asleep at the wheel. We have put this disturbing montage together for you. Beware! This is not for the faint of heart. If you are prone to nausea, grab a bag or garbage can; you are going to need it.
MERRILL AND TYCO
“Komansky and Kozlowski sittin on a tree”
These two big crooks on the block probably were not “kissin” but they most certainly were scheming. In a disturbing Wall Street Journal article, Charles Gasparino reported that David Komansky, CEO of Merrill Lynch, fired a stock analyst after Tyco’s now infamous CEO, Dennis Kozlowski, told him to.
In a face-to-face meeting between the two, Denny K. told David K. that he was not pleased that Merrill had the rating of “accumulate” on Tyco. So David K. fired the analyst and promptly hired an analyst that put a buy on the stock.
In case you did not know, Wall Street is not supposed to work that way. Investors should be able to get unbiased information; not research reports that are bought and sold to the highest bidder. Since 1996, Merrill has been Tyco’s top underwriter, as well as being its primary advisor for mergers and acquisitions. According to Thomson Financial, in 1998, the year before David K. had the analyst fired, Merrill advised on $15.1 billion in Tyco acquisitions. Merrill ranked “numero uno” in underwriting stock for Tyco every single year from 1995 through 2000. The year after David K. hired the “Tyco friendly” analyst, Merrill had its best year, underwriting more than $3 billion in stock deals.
This problem is not new. We have chronicled stories such as these involving Merrill for years. The dishonest practices of this firm are atrocious. However, what I found more appalling this past month were the comments made by Merrill’s President and COO, Stan O’Neal on September 4, 2002. His statements speak for themselves.
“Financial information must be transparent…accurate…timely and straightforward. Checks and balances. Auditors, accountants, regulators and financial institutions that are engines of capital formation must be vigilant…objective…and independent. Financial institutions are reaffirming their commitment to putting clients first. For example, by strengthening the clarity, objectivity, and independence of investment research.”
This is a joke. Merrill Lynch has done nothing to change its ways. In fact, they are up to many of their old tricks. Checks and balances are impossible with the inherent conflict of interest that exists not only at Merrill, but at all other investment banks that offer research services. As far as clarity of research is concerned, try reading one of Merrill’s “puff piece” analyst reports.
“At Merrill Lynch, we believe in these reforms, we’ve had virtually all of them in place for years and we are fully complying.”
Do us a favor Stan! Do not insult our intelligence. Merrill Lynch obviously believes that the lies will eventually become reality. Your gang has been pushing the envelope for years, always at the expense of the individual investor.
“In our Private Client business, we know that managing people’s wealth is a very emotional and personal process. Attempting to capture this market with one-size-fits-all or transaction based models does not work. Merrill Lynch has the best group of financial advisors in the world skilled at forging relationships and providing advice that helps our clients meet real needs so deeply personal to them.”
Once you get Stan going the “BS” keeps on flowing. Merrill Lynch has one focus, one goal alone, that is to better their bottom line. If a few investors get in the way, so be it. They do not care about the average American investor. They chew them up and spit them out. The advisors at Merrill Lynch are highly skilled salesmen, nothing more nothing less. I don’t care what their business card says. As far as investment products are concerned, Merrill invented the one-size-fits-all product. As a matter of fact, they just launched a national advertising campaign to promote their latest bottomless pit creation.
CREDIT SUISSE FIRST BOSTON
“Protecting the net worth for criminals, Nazis, dictators, and homicidal butchers for hundreds of years.”
I have a wonderful idea! Let us allow the world’s most crooked banks to come into our country and buy up many of our country’s financial institutions. The very same banks that are continuing to hide money from holocaust victims. The same financial institutions where Osama, Idi, Slobadon, and Yasser put their money. That is exactly what this country needs, more white-collar criminals. Well, we already did it. We allowed it. They are here. In 1997 Swiss banks went on a Wall Street buying spree and many of our once proud financial institutions are now carrying red pocketknives, eating mass amounts of chocolate, wearing nice watches, and, of course, “handling” assets.
Gretchen Morgenson of the New York Times obtained e-mails from an individual close to an investigation being conducted by the SEC and the North American Securities Administrators Association. The following e-mails were sent between the head of equity research and an analyst at Credit Suisse who acquired Donaldson, Lufkin & Jenrette on November 3, 2000. The name of the analyst is Kevin A. McCarthy and the subject of the messages is his research report on Lantronix Inc. Lantronix Inc. was a network device server company. Donaldson was the lead underwriter for the company on August 4, 2000. A few short weeks after the IPO, Mr. McCarthy recommended investors to run out and buy Lantronix.
The correspondence between McCarthy and Elliott Rogers, who was head of equity research, detail how investment bankers put a great deal of pressure on his research. Even though the stock was a “dog” and was dropping like a rock McCarthy was told to maintain a buy. In an email message dated November 8, 2000, McCarthy stated that he was required to recommend the stock, and that his involvement with the company was “an embarrassment.” McCarthy stated that the bankers had “acted as a proxy for management” while he was prohibited from performing any in-depth analysis of the financials. In a message to Mr. Rogers he writes, “I have put my reputation on the line to sell this piece of junk.”
The Peoples Republic of Massachusetts is currently investigating CSFB and has been gathering some 80,000 e-mail messages and other documents between analysts and bankers. They are uncovering many instances where analysts were pressured in writing marketing pieces instead of objective research. These e-mails have also shown a link between analyst compensation and the quantity of banking business they worked on. Bear in mind that the sales department is supposed to be completely separate from banking.
According to Michael Schroeder and Randall Smith of The Wall Street Journal, one analyst in CSFB’s technology group complained to superiors that he had “learned to adapt a set of rules that have been imposed by Tech Group so as to keep our corporate clients appeased.” In another e-mail the same analyst wrote, “I have painfully learned that being vocally cautious can be detrimental.” When the analyst issued a downgrade on a tech stock he was blamed for not giving the said company a “heads up” while the company executives complained bitterly about the report.
This same analyst in another e-mail speaks of CSFB’s unwritten rules.
RULE #1 If you can’t say something positive about a company don’t say anything at all.
RULE #2 Go with the flow with all the other analysts; never be a contrarian.
There are so many instances of lies, greed and manipulation in the e-mail messages that if I were to chronicle them all, the Markowski Monthly would take on a War and Peace girth. We were the first to tell you about the problems that were going on at our favorite Swiss banks, and once again we were right on target. CSFB was fined $100 million back in January of this year for manipulating and flipping IPO’s. These banks are experts’ at the most loathsome banking practices. As far as deciding over their own selfish needs and the needs of the American investor, in this instance, the Swiss are not neutral. The New York State Attorney General, Eliot Spitzer has just recently received a criminal referral from the state of Massachusetts recommending that they file criminal charges against CSFB over the firm’s research.
“Darth Vader and the evil empire strike again.”
Our nemesis and sworn enemy of all individual investors has been keeping itself very busy. Once again, Citigroup’s brokerage unit has been caught in a myriad of lies. Salomon Smith Barney stated that they had nothing to do with allocating hot IPO’s to their partners in crime. (SEE MARKOWSKI MONTHLY AUGUST 2002, TELECOM MAFIA.) This past month we have discovered otherwise.
According to documents submitted to Congress in response to a subpoena, the head honchos over at WorldCom received thousands of shares of hot technology and telecom IPO’s. Bernie Ebbers, the former disgraced head of WorldCom himself alone received almost one million shares in stock. The information also indicated that Salomon’s faithful storm trooper and telecommunications analyst, Jack Grubman, was a player in the allocation process. In his testimony in July of 2002, Mr. Grubman said he could not recall whether WorldCom received shares in “hot” IPO’s.
The same gang of crooks was up to their eyeballs in fudging research reports for their favorite clients. The National Association of Securities Dealers fined Salomon Smith Barney $5 million for issuing misleading research reports in 2001 on Winstar Communications. The problem is that Winstar, as we have documented here in the Markowski Monthly, was not an isolated case. Salomon consistently put out research reports that were of zero value to the investing public. These reports only benefited themselves. I have a huge problem with these cozy settlements between these self-regulatory bodies and the perpetrators they are supposed to police. Neither admitting nor denying wrongdoing does little to clean up Wall Street. Additionally, Citigroup makes $5 million approximately every 5 minutes.
In another tale of terror, Citigroup agreed to pay $240 million to settle accusations that its consumer finance unit charged excessive fees on loans to customers with less than A-rated credit. Citigroup was charging excessive fees in what amounted to one of the largest cases of predatory lending ever. Citigroup is looking to put its dirty past behind it by paying everyone off. Charles Prince, Salomon Smith Barney’s new chief executive has been cutting many checks to reach settlements with regulators and prosecutors in order to silence all the opposition. Quite frankly, it’s working.
The arrogance of Citigroup was on display this past month with statements coming from Darth Vader himself, their CEO, Sandy Weill. Here are a few sordid examples.
“We have found no evidence that shares of IPO’s were allocated as a quid pro quo for investment banking business.”
“Jack Grubman wrote what he believed, and was not influenced in his independence by investment bankers.”
“It is absurd to speculate that Citigroup had any knowledge of WorldCom’s accounting scandal.”
The large investment houses continue to insult the intelligence of American investors. The large firms are now settling all cases of malfeasance and are spending millions on new advertising campaigns to paint themselves as warm, soft and cuddly brokerage firms. The question is: Will Americans be suckered in again? Aside from their new marketing ploys, the big bad investment houses are rolling out all sorts of cleverly packaged investment products with promises of high returns and low risk. Sounds like déjà vu all over again. In next month’s issue we will break down Wall Street’s new and improved bottles of snake oil. Until then…Don’t drink the KoolAide!!!
TO BE CONTINUED…
I TOLD YOU SO!
New York State Attorney General Eliot Spitzer does not think the self-regulatory structure on Wall Street is working. In a speech to journalism students and faculty at Baruch College, Spitzer said that changing the way Wall Street conduct business is more important than destroying the “backbone” of the financial industry.
CAN YOU SAY…
Mr. Spitzer, if you are so vigilant in your “cleanup of Wall Street” why do you let every firm off the hook with a slap on the wrist?
Neither admitting nor denying wrongdoing is not exactly taking a powerful stance.
Also Mr. Spitzer, all those so-called “fines” you levied against Merrill Lynch, Salomon, CSFB, (etc.) are nothing more than tax write offs. Tax experts say the IRS will allow such deductions because companies can write off any “ordinary and necessary expense.” This is possible due to the fact that these “fines” are in fact nothing of the sort. They are characterized in the agreements as a civil settlement and not a fine.
We called Mr. Spitzer’s office for comment and were told that they could not be responsible for the tax code.
Yes Mr. Spitzer, and we cannot be responsible for you selling out. Do us a favor and practice what you preach.