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STATE OF
OFFICE OF
SECURITIES
121 STATE HOUSE STATION
AUGUSTA, ME 04333
In
the matter of CREDIT
SUISSE FIRST CORPORATION, Respondent. |
) ) ) ) ) ) ) ) |
No.
03-102
CONSENT ORDER |
WHEREAS, Credit Suisse First Boston
LLC, f/k/a Credit Suisse First Boston Corporation (“CSFB”), is a broker-dealer licensed
in the State of
WHEREAS, coordinated investigations
into CSFB’s activities in connection with certain of its equity research and IPO stock allocation practices
during the period of 1998 through 2001 have been conducted by a multi-state
task force and a joint task force of the U.S. Securities and Exchange
Commission, the New York Stock Exchange, and the National Association of Securities
Dealers (collectively, the “regulators”); and
WHEREAS, CSFB has advised regulators
of its agreement to resolve the investigations relating to its research and stock allocation
practices; and
WHEREAS, CSFB agrees to implement
certain changes with respect to its research
and stock allocation practices, and to make certain payments; and
WHEREAS, CSFB elects to permanently
waive any right to a hearing and appeal under 32 M.R.S.A. §§ 10708-10709 with
respect to this Consent Order (the “Order”);
NOW, THEREFORE, the Securities
Administrator of the State of Maine Office of Securities, as
administrator of the Revised Maine Securities Act, 32 M.R.S.A. §§ 10101-10713, hereby enters this Order:
I.
CSFB admits the
jurisdiction of the Office of Securities, neither admits nor denies the
Findings of Fact and Conclusions of Law contained in this Order, and consents
to the entry of this Order by the Securities Administrator.
1. Summary
From
July 1998 through December 2001 (the “relevant period”), CSFB used its equity
research analysts to help solicit and conduct investment banking business. By providing incentives for equity research
analysts to assist in the generation of investment banking revenues, CSFB
created and fostered an environment with conflicts of interest that, in some
circumstances, undermined the independence of research analysts and affected
the objectivity of the reports they issued.
The
conflicts of interest and pressure on equity research analysts to contribute to
investment banking revenue were particularly present in CSFB’s Technology
Group, headed by Frank Quattrone, where research analysts’ supervision and
compensation were closely aligned with investment banking. CSFB’s investment banking revenue, driven mostly by
technology stocks, steadily and significantly increased, from $1.79 billion in
1998, to $2.32 billion in 1999, and to $3.68 billion in 2000. The sphere of influence and authority that
Quattrone exercised at CSFB remained significant throughout the technology
boom.
CSFB’s efforts to attract
potential and continued investment banking business created pressure on equity
research analysts to initiate and maintain favorable coverage on investment
banking clients. This pressure at times
undermined equity research analyst objectivity and independence. CSFB’s marketing, or “pitch,” materials in
some instances implicitly promised that a company would receive favorable
research if it agreed to use CSFB for its investment banking business. In addition, companies, in some instances
pressured analysts to continue coverage or maintain a certain rating or else
risk losing the company as an investment-banking client. In certain instances, these factors
compromised the independence of equity research analysts and impaired the
objectivity of research reports.
The independence of some of
CSFB’s equity research analysts was also impaired by the fact that they were
evaluated, in part, by investment banking professionals and that their
compensation was influenced by their contribution to investment banking
revenues. Indeed, the vast majority of
their overall compensation, in the form of bonuses, was based on the investment
banking revenues generated by the firm.
In many instances, bonuses for non-technology equity research analysts’
were directly linked to revenue generated by the firm on specific investment
banking transactions. The fact that an
equity research analyst’s bonus was in part related to revenue from investment
banking business created pressure on analysts to help generate more investment
banking revenue.
The undue and improper
influence imposed by CSFB's investment bankers on the firm's technology
research analysts caused CSFB to issue fraudulent research reports on two
companies: Digital Impact, Inc. (“Digital
Impact”) and Synopsys, Inc. (“Synopsys”).
The reports were fraudulent in that they expressed positive views of the
companies' stocks that were contrary to the analysts' true, privately held
beliefs. In these instances, investment
bankers pressured research analysts to initiate or maintain positive research
coverage to obtain or retain investment banking business, and the analysts were
pressured or compelled to compromise their own professional opinions regarding
the companies at the direction of the firm's investment bankers. In addition, as to Numerical Technologies,
Inc. (“Numerical Technologies”), Agilent Technologies, Inc. (“Agilent”), and
Winstar Communications, Inc. (“Winstar”) ‑ the pressure on analysts
resulted in the issuance of research reports that lacked a reasonable basis,
failed to provide a balanced presentation of the relevant facts, made
exaggerated or unwarranted claims, or failed to disclose material facts; as to
NewPower Holdings, Inc. (“NPW”), CSFB issued research reports which, at times,
failed to disclose that CSFB and the research analysts covering NPW had
proprietary interests in NPW.
CSFB also engaged in
improper IPO “spinning” activities. From
1999 until April 2001, CSFB, through its Technology Private Client Services
Group, a department within the Technology Group, allocated shares in CSFB’s
lead-managed technology IPOs to executive officers of its investment banking
clients who were in a position to provide investment banking business to CSFB. This group engaged in such spinning with the
belief and expectation that the executives would steer investment banking
business for their companies to CSFB.
CSFB opened discretionary trading accounts on behalf of these
executives. Since most of the IPOs
offered by CSFB were “hot” (i.e., they began trading in the aftermarket at a
premium), and since portions of the allocations were typically “flipped” out
(i.e., sold almost immediately) once the aftermarket opened, the spinning
produced large, instantaneous profits for those executives who participated in
these arrangements. By having CSFB
brokers control trading in these accounts, the executives who owned some of
these accounts were able to realize profits in excess of $1 million through
this IPO activity.
CSFB LLC (“CSFB”), or a
predecessor firm thereof, has been an NASD member since 1936. CSFB, headquartered in
Until June 1998, all of
CSFB’s equity research was issued through research analysts who worked in the
Equity Research Department and who reported to the Director of Equity
Research. Until that time, no equity
research analysts were supervised by or had any reporting obligations to anyone
in any investment banking department.
In June 1998, CSFB recruited
Frank Quattrone, who was then in a senior position at Deutsche Bank Securities
(also known as Deutsche Morgan Grenfell Inc. or “DMG”) to head a distinct unit
the Technology Group at CSFB that would provide an array of services to
technology companies. Quattrone became the Managing Director of the CSFB
Technology Group’s Investment Banking Division, and negotiated a contract with
CSFB to maintain the Technology Group as a semi-autonomous,
“firm-within-a-firm” unit within CSFB through December 2001.
Quattrone established
separate departments within the Technology Group for corporate finance
(investment banking), mergers and acquisitions, equity research, and a
department devoted to private client services (“PCS”), each of which reported
to him. One of the purposes of the PCS
department was to provide personal brokerage services to officers of investment
banking clients of the Technology Group.
The directors of the Technology Group Research Department and PCS
Department had dual reporting obligations to Quattrone and to department
directors in the firm’s Equities Division, but as a practical matter, the
principal reporting line was to Quattrone until a change in procedures
instituted in June 2001.
CSFB hired individuals who
had worked closely with Quattrone at DMG to fill many senior level positions,
including each of the department directors, within the Technology Group. Many of the people
whom CSFB hired to work in the Technology Group had worked together previously
at DMG. In fact, many of the equity
research analysts and investment bankers whom CSFB employed from July 1998
through 2001 were recruited or merged into CSFB from other firms. The first infusion of those professionals
came in July and August 1998, when the directors and others from DMG formed the
Technology Group at CSFB. Given the wholesale move of the personnel, including senior management in
research and investment banking, the reporting structure, work ethic, and
future expectations of their roles likewise carried over to their new positions
at CSFB.
As
a result of the structure set forth above, Quattrone exercised his authority to apply an overall Technology Group
strategy in his supervision of the Group’s research analysts. He used that authority for “resource
allocation” to influence the determination of those sectors, and in some cases
the particular companies on which Technology Group research would initiate or
maintain coverage. As a consequence of Quattrone’s influence, Technology
Group investment bankers were, at times, able to influence the
sectors, and in some cases the particular companies, for which CSFB technology research analysts initiated
or maintained coverage. At times, this
determination was based on the level of CSFB’s actual or
anticipated investment banking business with a
particular company.
c. Investment Banking Revenue Was a Major
Source of Revenue and Influence at CSFB
From 1998 to 2000, CSFB’s
income from investment banking rose dramatically, fueled primarily by the
technology sector offerings completed under Quattrone’s leadership. In 1998, driven in large part from the
revenue generated by the newly formed Technology Group, CSFB’s investment
banking revenue increased from approximately $1.47 billion to approximately
$1.79 billion or 21 percent. In 1999,
the importance of investment banking as a major source of revenue continued to
grow, as did its revenue and number of employees. That year, revenue from investment banking
grew to approximately $2.318 billion, a 22 percent increase over 1998. Also in 1999, largely through the efforts of
the Technology Group, CSFB managed more domestic IPOs than any other investment
banking firm. By 2000, CSFB’s investment banking
revenue had mushroomed to approximately $3.681 billion, a full 59 percent
increase over the previous year.
Investment banking revenue in 2000 represented the largest percent
increase in revenue for CSFB, constituting its second largest revenue source
behind equity trading and sales and accounting for 30 percent of the firm’s
total revenues.
d. CSFB’s Equity Research Analysts’ Bonuses Were
Determined, in Part, by the Degree to Which They Assisted Investment Banking,
Thereby Compromising Research
From July 1998 until May
2001, equity research analysts in non-technology sectors at CSFB received
bonuses that were directly and indirectly based on the amount of investment
banking revenue they helped generate.
This created a conflict of interest for research analysts who had an
incentive to help win investment banking deals for CSFB while they were also
expected to issue objective research regarding those companies.
Specifically, equity
research analysts were paid up to three percent of the net revenue generated by
an investment banking deal, with a maximum bonus of $250,000 per deal. Some equity research analysts were also
guaranteed a minimum bonus of either $15,000 or $20,000 for the investment
banking deals on which they worked, depending on whether CSFB was lead or
co-manager of the deal. This compensation
was not part of the annual bonus, but was pursuant to employment contracts,
paid on a quarterly basis. This program
was initiated to provide an incentive for research analysts to assist in
winning investment banking business.
According to the Director of Equity Research:
the head
of equity capital markets and investment banking, felt that they needed some
help in '98 in generating additional ... help on investment banking
transactions or at least ... having analysts feel that it was somewhat part of
their compensation.
The actual amount paid to a
research analyst was based on the level of contribution that the research
analyst made in connection with investment banking deals, as decided with input
from the investment bankers. The
conflict was evident in the reviews performed by investment bankers as well as
self-reviews prepared by research analysts.
In evaluating the
performance of equity research analysts to determine their compensation,
investment bankers used a form that judged the analyst by origination of the
deal, execution of the deal, and follow-through. Each section allowed for handwritten comments
and called for the investment banker to rank the research analyst from one to
three.
In one such evaluation, an
investment banker wrote that the research analyst’s “input and track record was
critical to winning this business…. [The analyst] performed at her normal high
level making a lot of investor calls….
[The analyst’s] initiation of research coverage was timely and
insightful. She has been a supporter of
the stock despite difficult Internet environment.”
From July 1998 until
December 2001, equity research analysts employed in the Technology Group were
compensated, in part, based on their contribution to investment banking
deals. The vast majority of equity
research analysts’ compensation was derived from the bonus received rather than
the base salary. At CSFB, it was not
uncommon for a more senior level Technology Group research analyst to have a
salary of $100,000 - $250,000, and also receive a bonus of $5,000,000 -
$10,000,000 or higher. The Technology
Group bonus pool was funded by fifty percent of technology-related investment
banking revenues minus select expenses (including mergers and acquisitions)
as well as a percentage of revenue generated by secondary sales and trading in
technology stocks, and a percentage of Technology PCS revenues. In determining the allocation for each
analyst, the Director of Technology Research stated that he would review
revenue generated with respect to each company followed by the analyst,
including revenues relating to banking, sales, trading, derivatives, high
yield, private placements, and specialty gains on the desk. That amount of revenue formed the “starting
point” of determining an individual’s bonus, after which additional factors
such as the analysts’ rating in polls were considered. The Director of Technology Research made an
initial recommendation regarding the bonus component of a research analyst’s compensation. The final decision was made by three
people: Quattrone, and the heads of the
Technology Group Mergers and Acquisitions and Corporate Finance
departments.
The influence of investment
banking revenue to the bonus is evidenced in an e-mail from Quattrone to
Technology Group officers, including officers in the research department. The subject line of the e-mail included
“Please submit your revenue sheets if you want the highest bonus
possible.” In the e-mail, Quattrone
wrote in part, “Your trusty management team is meeting … to determine
compensation for the group….” The
message then urged all the officers to submit a list of the banking deals they
participated in so as to ensure a complete list for determining compensation. The emphasis on a research analyst’s
contribution to investment banking revenues, along with the influence of
Quattrone and other department head in determining compensation, created a
conflict of interest for analysts who were charged with the responsibility of
preparing and issuing objective research reports.
e. Investment Bankers Evaluated Research Analysts’ Performance,
Thereby Influencing Their Bonuses and Compromising Research Analysts’
From July 1998 through 2001,
investment bankers who worked with equity research analysts on investment banking
deals, in both the Equity and Technology Groups, participated in the analysts’
annual performance evaluations, which in turn affected analysts’ bonuses. This input from investment bankers provided a
further incentive to equity research analysts to satisfy the needs of
investment bankers and their clients, and placed additional pressure on
research analyst to compromise their independence.
In 2000, CSFB investment
bankers used a specific form in order to evaluate equity research analysts,
entitled “Evaluation By Banking and Equity Capital
Markets Professionals.” On the form,
investment bankers reviewed the work of specific research analysts under
different categories and provided an overall ranking for the analyst.
As an example, in one
section called “Business Leadership,” an investment banker wrote of a research
analyst: “Coordinates ideas in support
of Banking Business; good commercial instinct.
Develops and utilizes relationships with client Senior Management,
including CEO’s, in pursuing business. Represents firm well.”
The conflict between
conducting objective research and attracting and retaining investment banking
clients was also evidenced in analysts’ self-reviews. For example, one analyst wrote in his
self-evaluation: “Trying to manage the
research/banking balance. Particularly challenging for me given the amount of banking we do
and our dominant banking franchise that has deep roots at CSFB.”
f. CSFB’s Technology Research Analysts Played a Key Role at Investment Banking “Pitches” to
Help CSFB Win Investment Banking Deals – Including at Times the Implicit
Promise of Favorable Research
Between July 1998 and 2001, Technology
Group research analysts played a key role in helping to win investment banking
business for CSFB. Once CSFB’s
technology bankers – with the assistance of the technology research analysts –
determined that a company was a strong candidate for an offering, a technology
research analyst assisted in CSFB’s sales “pitch” to the company, in which CSFB
would explain why it should be chosen as the lead managing underwriter for the
offering. Quattrone described the
relationship between the technology research analysts and investment bankers as
follows: “[I]n many of the things that
we did with our clients, both groups [Technology Banking and Technology
Research] were involved. And the clients
experienced CSFB, and in some sense both bankers and analysts worked together
in a collaborative fashion to deliver service to a client.”
As part of the sales pitch,
technology research analysts prepared selling points regarding their research
to be included in the pitch books presented to the company. They also routinely appeared with investment
bankers at the pitches to help sell CSFB to the potential client. The Director of Research for the Technology
Group, described the technology research analyst as the “star of the show” at
pitches. CSFB pitch books to potential
clients included representations about the role the technology research analyst
would play if CSFB obtained the business.
The analyst’s written and oral presentations, and the presence of a
research analyst at the pitch, strongly implied and at times implicitly
promised that CSFB would provide positive research if awarded the investment
banking business.
For example, in the pitch
book for Numerical Technologies, the discussion regarding research coverage
headlined “Easy Decision…Strong Buy,” implicitly promising that CSFB would
issue a “strong buy” rating upon initiation of coverage. In another example, in a Fall
1999 pitch to a different technology company, CSFB’s pitch book stated that the
particular CSFB technology research analyst who would cover the company “[g]ets
it,” would “pound the table” for the company, and would be the company’s
“strongest advocate.” In addition, the
pitch book stated that research analyst would engage in “pre-marketing
one-on-one meetings [with potential investors] prior to launch.”
g. Equity Research Analysts
Were at Times Pressured by Investment Bankers to Initiate or Maintain Positive
Research Coverage
CSFB investment bankers,
including senior bankers, at times pressured research analysts to initiate or
maintain coverage on companies to further ongoing or potential investment
banking relationships. Bankers at times
applied undue pressure on equity research analysts to initiate research on
companies they otherwise would not have covered, maintain ratings they
otherwise would have lowered, and maintain coverage of companies they otherwise
would have dropped, but for the investment banking relationship.
In
June 1999, CSFB’s Technology Group investment bankers learned from a corporate
official at Gemstar-TV Guide International, Inc. (“Gemstar”) that the company
was interested in conducting a secondary offering of its stock. Company officials informed the CSFB
investment bankers that publication of research by CSFB was a prerequisite to
CSFB being named the investment banker for the planned offering. A Technology Group investment banker informed
the company official that CSFB would initiate coverage by July. The investment banker then informed the
analyst of the potential investment banking business and noted that it was
conditioned on CSFB initiating research for the company. When the research analyst informed the
investment banker that other obligations, including administrative
responsibilities, would keep him from conducting the necessary research in the
time frame mentioned by the banker, Quattrone challenged the research analyst’s
priorities and directed that he conduct the review of the company on a more
aggressive schedule.
On
adamantly stated that there will be no [investment banking] transaction without prior research. As you know [another Gemstar representative] has also expressed this same sentiment with regards to working on CSFB. We informed [the Gemstar representative] that you intend to initiate coverage by July, which would facilitate a September offering. … The main takeaway from the meeting was that there is an opportunity for a very large secondary offering in the second half of this year. We need research for this to happen.
Later that day, the research
analyst e-mailed the investment banker, with a copy to Quattrone, stating that
he could not even look at the matter for almost another three weeks, given his
need to study for an examination. In
response to that e-mail, Quattrone instructed the research analyst by e-mail to
“take a day off from your test prep and go down this week or next.” Quattrone then e-mailed the chain of messages
to the heads of other Technology Group departments and another individual,
noting that Quattrone was “trying to shame” the research analyst into
conducting the due diligence and ultimately initiating research coverage of the
company without delay.
Another example of this kind of conduct relates to Allaire Corp.
(“Allaire”), which develops and supports software for a variety of web
applications. In January 1999, CFSB
acted as the lead manager for Allaire’s IPO, earning more than $3.5 million
from the offering. CSFB was also the
lead manager of a secondary offering for Allaire in September 1999. The total fees for that offering exceeded $10
million. On
The new research analyst’s assumption of coverage was delayed and, as
of early July 2000, the analyst assigned to cover Allaire had issued no new
research on the company. In a
[N]o …way do we accept this
proposal. [P]lease discuss with me [and
others] first thing in the morning. [W]e
have agreed on the script, which is books or walk and
drop coverage.
h. CSFB Technology Group’s Practice of Allowing
Equity Research Analysts to Discuss a Proposed Rating with Company Executives
in Advance of Publishing the Rating Caused Undue Pressure to Initiate or
Maintain Positive Research Coverage, and at Times Compromised Equity Research
Analyst Independence
CSFB Technology Group
allowed its research analysts to provide executives of companies for whom they
were about to issue research, with copies of analyses and proposed ratings of
their reports for editorial comment prior to dissemination. Technology Group
research analysts provided this information, in part, in an attempt to maintain
their good standing with the company.
This type of direct interaction between analysts and issuers provided
additional pressure on the equity research analysts and at times compromised
the independence of the research analysts.
For example, on
With icube about to close, we need to think
about resuming coverage of the fish. I want your opinion on rating. We would have taken you to a strong buy but
given the recent stock run, does it make sense for us to now keep the upgrade
in our back pocket in case we need it?
Either way, I don’t care. You
guys deserve it, I just don’t want to waste it.
The CEO of RAZF
responded to the research analyst, stating: “I think we should re-initiate with
a buy and a higher price target and keep the upgrade for a little while…. Although its [sic]
getting hard to justify the valuations.”
In this case, the
research analyst re-initiated coverage on
3. CSFB Issued Fraudulent Equity Research Reports on Two Companies in the
Technology Sector: Digital Impact and Synopsys.
Those Reports Were Unduly Influenced by Investment Banking Considerations
The undue, improper
influence that investment banking exerted over research analysts caused
technology research analysts to issue fraudulent research reports on two
companies, Digital Impact and Synopsys.
Specifically, investment bankers pressured research analysts to initiate
or maintain positive research coverage of these two companies in order to
obtain or retain investment banking business.
The analysts were pressured or compelled to compromise their own
professional opinions regarding companies at the direction of the firm’s
investment bankers.
a. Digital Impact, Inc.
Digital Impact, Inc.
(“DIGI”) is a company involved in online direct marketing. CSFB acted as the lead manager for the DIGI
IPO in November 1999, earning more than $5 million from the offering. Following the IPO, a CSFB technology research
analyst initiated coverage with a “buy” rating.
At that time, DIGI traded for just under $50 per share. Between January 2000 and April 2001, as the
stock price declined to less than $2 per share, CSFB maintained either a “buy”
or a “strong buy” rating on the stock.
In May 2001, after the
original analyst had left CSFB, a senior research analyst in the Technology
Group was assigned coverage of DIGI. At
that time, DIGI was trading for less than $2 per share. CSFB assumed coverage and “buy” ratings in June and July
2001. Thereafter, the senior research
analyst then met with the company and determined that he wanted to drop
coverage of DIGI, noting that DIGI’s “market opportunity was just very
competitive … and … they were going to have … a difficult time thriving in that
environment.”
The senior research analyst
attempted to drop coverage of DIGI on two occasions. On both attempts, the senior research analyst
acceded to requests from an investment banker in the Technology Group that he
not drop coverage. In a
I think [the other
investment bankers] will ask for continued cov’g on DIGI given ongoing
relationship, good [venture capitalists] and CSFB led IPO.
Despite his own desire to
drop coverage of the stock, the research analyst acceded to the desires of the
investment banker and did not drop coverage on DIGI. The research analyst maintained coverage, and
left the “buy” rating unchanged until
b. Synopsys,
Inc.
Internal e-mail
correspondence among research analysts regarding Synopsys shows that the
pressure imposed by investment bankers on research analysts to initiate or
maintain favorable coverage was not an isolated problem at CSFB. In May 2001, a technology research analyst
wrote an e-mail to the Head of Technology Research, complaining of:
Unwritten Rules for Tech Research: Based on the following set of specific situations that have arisen in the past, I have ‘learned’ to adapt to a set of rules that have been imposed by Tech Group banking so as to keep our corporate clients appeased. I believe that these unwritten rules have clearly hindered my ability to be an effective analyst in my various coverage sectors.
The research analyst wrote
that, after downgrading a company in 1998, his investment banking counterpart
“informed [him] of unwritten rule number one: that ‘if you can’t say something
positive, don’t say anything at all.’”
Regarding a second company about which he had reported in 1999, the
analyst wrote that he:
issued some cautionary comments in the Tech Daily. … CEO completely lost his composure and swore to the banker, … that [second company] would never do any business with CSFB (another GS client we were trying to court). At the time, [the investment banker] informed me of unwritten rule number two: ‘why couldn’t you just go with the flow of the other analysts, rather than try to be a contrarian?
[s]uspected a down-tick in guidance coming and
wanted to moderate rating from strong buy to buy. However, banking felt this might impact
CSFB’s ability to potentially do business with the company downstream. … By
following rules 1 & 2, I had successfully managed not to annoy the company,
or banking.
Based on these incidents, the analyst concluded that he was “not naïve
enough to lack a sense of appreciation of the role of investment banking (and
banking fees) for the franchise.”
4. CSFB Issued Research on Four Companies that
Lacked a Reasonable Basis, Made Exaggerated or Unwarranted Claims, was
Imbalanced, or Lacked Full and Accurate Disclosures
As to four companies, CSFB’s equity research
analysts issued research that lacked a reasonable basis for the claims made,
made exaggerated or unwarranted claims, failed to provide a balanced
presentation of the relevant facts, and/or failed to disclose important
information about the company or CSFB’s and its research analyst’s relationship
to the company.
a. Numerical Technologies, Inc.
In April 2000, CSFB acted as lead manager on the IPO of Numerical Technologies for which it received a fee of more than $5.4 million. Following the IPO, a Technology Group research analyst informed a company official that he planned to initiate coverage with a “buy” rating. The official complained about the proposed rating to an investment banker at CSFB. According to the analyst, the investment banker successfully urged the analyst, “against [the analyst’s] better judgment,” to initiate coverage with a “strong buy” rating.
b. Agilent Technologies, Inc.
In
certain instances, CSFB equity research analysts maintained positive ratings in
published research reports, while conveying a more negative outlook regarding
the stock to their institutional customers within the text of the written
research reports. In describing the ratings
used from July 1998 through 2001 and beyond, research analysts did not use the
same description of the rating as CSFB’s published description. According
to one senior research analyst:
Different analysts have different ways they would interpret a hold rating
… And I think it's probably fair to say that for a number of analysts,
particularly because of the fear of backlash that we get from a company … or …
that we get from institutional investors, there would be a hesitancy to use the
“sell” rating. So
analysts did have a tendency to somehow use a hold with more of a negative
slant to it.
[T]he monthly review and comment we would verbally
describe what we meant by each of the four ratings that I mentioned before. But there was a lot of latitude left to the
individual analyst to kind of use the rating I don't want to say in a custom
tailored way, but certainly there would be some judgment applied by the analyst
in terms of how they would use this specific rating to their sector.
This approach manifested itself with regard to Agilent Technologies,
Inc. CSFB was the co-manager for the
The report also indicated
that:
Agilent is rated Buy, only
in the most generous sense, though in the short term we would only buy it on
extreme weakness, with a 12-24 month time horizon. Our near-term concern is that problems are
not typically resolved in one or two quarters.
CSFB maintained its “buy” rating
until February 2001 when it finally downgraded to “hold.” This came only after Agilent preannounced
second quarter revenues and suspended earnings guidance for the remainder of
the year, citing a “dramatic slowdown in customer demand.” CSFB’s positive rating of Agilent for an
extended period of time despite negative news was cited by a research analyst
in CSFB as an example of maintaining a positive rating while signaling negative
news to large institutional clients.
Following the
c. Winstar
Winstar Communications, Inc. (“Winstar”), a provider of
broadband telecommunications services, traded on the Nasdaq National Market
using the symbol WCII. Winstar competed
in the capital-intensive competitive local exchange carrier, (“CLEC”), industry
with much larger, established regional
Winstar never operated at a
profit, suffered significant losses, and needed large amounts of capital to
survive. As of
net loss of $894.2 million, and
($9.67) in earnings per share. Net loss
to common stockholders totaled more than $1 billion. On
CSFB, acting through two research analysts in its Equity
Research Department, wrote and issued research reports during 2001 that lacked
a reasonable basis for its target price and failed adequately to disclose risks
of investing in Winstar. Indeed, CSFB’s
reports during this period did not indicate that investing in Winstar was
risky. The firm had initiated equity
research coverage of Winstar in May 2000, with a “strong buy” rating and a
12-month target price of $79. CSFB
retained the $79 target price from
The following graph demonstrates how CSFB maintained a “ strong buy” rating while Winstar’s stock price fell:
CSFB Lacked a
Reasonable Basis for the $79 Target Price
In three reports between
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·
·
From
Reports issued in 2001 also failed to disclose that the terms “target price,” “price objective,” or “percentage upside” did not represent the price at which CSFB believed Winstar stock would be trading in 12 months. Instead, CSFB used those terms to reflect the theoretical value of Winstar’s worth in 12 months if a buyer valued Winstar using CSFB’s valuation methodology. CSFB, however, failed to disclose that it was using the terms in this manner.
CSFB Failed Adequately to Disclose
Significant Risks of Investing in Winstar
The January 5, 2001, January
8, 2001, and March 1, 2001 reports failed adequately to disclose the risks of
investing in Winstar, particularly the risks related to funding, including
Winstar’s need to raise more than $3 billion to fund its business plan to reach
a free cash flow positive status and the risk that Winstar might not be able to
raise the necessary funds.
In a
[W]e maintain our forecast that WCII is funded into 1Q02 . . . . While we currently forecast that WCII needs over $3B of additional capital to reach a free cash flow positive status, …. WCII management effectively laid to rest many of the recent concerns that we have been hearing from investors, including the quality of WCII’s balance sheet as well as the company’s funding status.
While CSFB research reports identified certain issues relating
to funding, those reports did not adequately disclose funding risks or other
concerns regarding funding that CSFB equity analysts discussed in internal
e-mails. On
this is FYI … I worked this up to convince myself that wcii was indeed funded through FY01… I’ve included everything I know about for them over the next year, and it looks like they have $185M left at the end of the year.
Such analysis should have
been included in CSFB’s disseminated research in order to present a balanced
picture of the risks of investing in Winstar.
On
On
following the announcement of a major scale back in the firm’s expansion plans but without any positive developments on the much anticipated drive to secure additional sources of funding – both equity and network capacity sales. Given WCII’s lack of balance sheet flexibility due to approximately $360M of cash interest obligations in FY01 (growing to over $400M in FY02) and the current bleak capital markets environment, we believe that a significant balance sheet restructuring is one of the only situation under which the company can avoid more draconian scenarios.
CSFB had not
adequately disclosed in earlier reports the concerns mentioned in the
d. NPW
CSFB at times had a proprietary interest
in NPW that was not disclosed in research reports issued by the firm. Further, CSFB research analysts covering NPW
also had personal proprietary interests in the company but the firm failed to
disclose those interests in the published reports. The ownership interests of the firm and the
research analysts created a conflict of interest that should have been
disclosed.
NPW was incorporated in
November 1999 as EMW Energy Services Corporation, a division of Enron Energy
Services (a division of Enron Corporation ("Enron")). Until
On
Also during that
period, the senior research analyst covering NPW held undisclosed investments
in NPW. The senior analyst invested
approximately $21,000 of his own money, which was
leveraged 5:1 by CSFB, in NPW through DLJ partnerships that owned NPW
shares. In
addition, an associate research analyst who assisted in preparing the reports,
and whose name appeared on the reports, held 200 shares of NPW from
5. CSFB’s Technology PCS Group Engaged In Improper IPO
“Spinning” Allocations to Corporate Executives of Investment Banking Clients
Quattrone established the
Technology PCS (Private Client Services) Group to be part of the Technology
Group. The Director of Technology PCS
had a primary and direct reporting responsibility to Quattrone with a secondary
“dotted-line” reporting responsibility to the Director of CSFB’s PCS Department. Technology PCS focused exclusively on the
technology sector. Technology PCS
operated independently of CSFB’s other PCS brokers. The Technology PCS client base consisted,
almost exclusively, of officers of investment banking clients of the Technology
Group.
From approximately March
1999 through April 2001, Technology PCS improperly allocated “hot” IPO stock to
executives of investment banking clients and improperly managed the purchase
and sale of that stock through discretionary trading accounts. CSFB’s Technology Group gave improper
preferential treatment to these company executives with the belief and
expectation that the executives would steer investment banking business for
their companies to CSFB.
These executives profited
from their allocations of “hot” IPO stock.
During this time period, the share value of the technology-related IPOs
in which CSFB served as bookrunning manager increased dramatically, with the
average share price increase in the immediate aftermarket exceeding 99 percent. In some instances, the aftermarket trading
was significantly higher. On
a. Discretionary Accounts were
Established for “Strategic” Executive
Officers of Issuers
Pitchbooks used by the Technology Group to win
an issuer’s investment banking business referenced the discretionary
accounts. Consistent with those
references and representations made at “pitches,” an issuer had to award CSFB
its investment banking mandate before the issuer’s officers were afforded the
opportunity to open discretionary accounts and given access to IPO shares by
CSFB. Likewise, CSFB considered ways to
reduce or eliminate IPO allocations to executives who changed employment and
were no longer affiliated with those companies.
Once Technology Group
received a mandate, Technology PCS established discretionary accounts for
executives who were considered to be “strategic.” “Strategic” was commonly understood by
Quattrone and Technology PCS managers to refer to the overall business
relationship CSFB had with the issuer, including potential future investment
banking business. The head of Technology
PCS defined “strategic as “senior decision makers” at existing or prospective
investment banking clients of the Technology Group who could influence their
companies’ choice of investment banker.
The accounts were ranked based on the executive’s perceived influence in
this regard, and “hot” IPO shares were allocated based on the ranking. Allocations ranged from 1200 shares for
accounts ranked one, to 300 shares for accounts ranked 4.
Technology PCS did not apply
standard CSFB qualification standards (i.e. assets under management, trading
revenue production, length of the brokerage relationship, etc.) for the opening
of these discretionary accounts.
Instead, the decision was based largely on the executive’s position and
influence at the company. Technology PCS
established a minimum funding level of $100,000 that was subsequently raised to
$250,000. Technology PCS also set
$250,000 as the maximum level of funds with which customers could fund the
discretionary accounts. These discretionary
accounts were limited to the purchase and sale of stock purchased through CSFB
IPOs. The account holders were not
permitted to buy or sell other securities in these accounts, as a result of
which Technology PCS turned away millions of dollars of potential customer
investments. The number of discretionary
accounts serviced by Technology PCS reached a peak in 2000 of approximately
285.
b. Technology PCS Allocated Shares in Every
IPO to the Discretionary Accounts and “Flipped” Stock out of the Accounts,
Generating Large Trading Profits for the Favored Executives
The Technology PCS Group
allocated shares to the discretionary accounts in every IPO in which the
Technology Group was involved. Senior
Technology Group managers participated in determining allocations to
discretionary accounts and deciding for whom such accounts were to be
opened. The overwhelming majority of
those IPOs were “hot.” Technology PCS
personnel decided when and how many IPO shares to sell from the discretionary
accounts. In some cases, all the shares
allocated to discretionary accounts were sold for a profit on the IPO’s first
day of trading in the secondary market.
In other cases, half the shares were sold within one or two days of the
offering and the remaining half sold sometime later. In virtually all instances, the “flipping” of
IPO shares out of the discretionary accounts resulted in the account holders
receiving substantial profits with no individual effort and minimal market
risk.
The table below provides examples of the extraordinary gains realized in these discretionary accounts and correlates them with the investment banking fees paid to CSFB by the companies with which the accountholders were associated:
Account # |
Company |
Position |
Rank |
Life of
Acct. (in years) |
Total
Gain |
Internal
Rate of Return |
IB fees
to CSFB |
RD1210 |
Egreetings |
CFO |
3 |
1.4 |
$585,000 |
335.98% |
$4,678,000 |
RD1260 |
El Sitio |
Co-founder |
1 |
1.31 |
$1,015,000 |
950.24% |
$4,911,000 |
RD1660 |
Next Level Comm. |
CFO |
2 |
1.25 |
$710,000 |
470.45% |
$9,860,000 |
RD1930 |
Phone.com |
Chairman & CEO |
1 |
1.0 |
$1,285,000 |
268.71% |
$80,720,000 |
RD2040 |
iPrint.com |
CEO |
2 |
1.15 |
$353,000 |
240.46% |
$1,297,000 |
c. Unofficial “Performance
Reports” were Developed and Distributed by Technology PCS Group Personnel to
the Account Holders
Technology PCS prepared
unofficial “Performance Reports” measuring the extraordinary performance of
these discretionary accounts and furnished the reports to the discretionary
account holders. These reports,
distributed monthly, showed, among other things, the length of time the account
had been open, the amount of contributions to the account, the total gain in
the account (before fees) and the account’s rate of return. These unofficial reports were meant to ensure
that the discretionary account holders were aware of the extraordinary gains
being generated for them through the flipping of IPO shares. Some show total gains over the life of the
account exceeding $1 million. One report
shows that in little more than a year and a half (September 19, 1999 to June 8,
2001), the account had a rate of return in excess of 3,800%.
II.
CONCLUSIONS OF LAW
1. The Office of Securities has jurisdiction over this matter pursuant to the Revised Maine
Securities Act, 32 M.R.S.A. §§ 10101-10713.
2. The Securities Administrator
finds that the above conduct is in violation of 32 M.R.S.A. §§ 10201, 10313(1)(G), and 10313(1)(J).
3. The Securities Administrator
finds the following relief appropriate and in the public interest.
On the basis of the Findings
of Fact, Conclusions of Law, and CSFB’s consent to the entry of this Order, for
the sole purpose of settling this matter, prior to a hearing and without
admitting or denying any of the Findings of Fact or Conclusions of Law.
IT IS HEREBY ORDERED:
$75,000,000 to the states (50 states, plus the
$75,000,000 as disgorgement of commissions, fees and
other monies as specified in the SEC Final Judgment;
$50,000,000, to be used for the procurement of
independent research, as described in the SEC Final Judgment;
CSFB agrees that it shall
not seek or accept, directly or indirectly, reimbursement or indemnification,
including, but not limited to payment made pursuant to any insurance policy,
with regard to all penalty amounts that CSFB shall pay pursuant to the Order or
Section II of the SEC Final Judgment, regardless of whether such penalty
amounts or any part thereof are added to the Distribution Fund Account referred
to in the SEC Final Judgment or otherwise used for the benefit of
investors. CSFB further agrees that it
shall not claim, assert, or apply for a tax deduction or tax credit with regard
to any state, federal or local tax for any penalty amounts that CSFB shall pay
pursuant to this Order or Section II of the SEC Final Judgment, regardless of
whether such penalty amounts or any part thereof are added to the Distribution
Fund Account referred to in the SEC Final Judgment or otherwise used for the
benefit of investors. CSFB understands
and acknowledges that these provisions are not intended to imply that the State of Maine Office of Securities would
agree that any other amounts CSFB shall pay pursuant to the SEC Final Judgment
may be reimbursed or indemnified (whether pursuant to an insurance policy or
otherwise) under applicable law or may be the basis for any tax deduction or
tax credit with regard to any state, federal or local tax.
Dated this 22nd day of September,
2003.
By: s/Christine
A. Bruenn
Christine
A. Bruenn, Securities Administrator
State
of
CONSENT TO ENTRY OF ADMINISTRATIVE ORDER BY CSFB
CSFB hereby acknowledges that it has been served with a copy of this Administrative Order, has read the foregoing Order, is aware of its right to a hearing and appeal in this matter, and has waived the same.
CSFB admits the jurisdiction of the Office
of Securities, neither admits nor denies the Findings
of Fact and Conclusions of Law contained in this Order, and consents to entry
of this Order by the Securities Administrator as settlement of the issues
contained in this Order.
CSFB states that no promise of any
kind or nature whatsoever was made to it to induce it to enter into this Order
and that it has entered into this Order voluntarily.
Gary G. Lynch represents that
he/she is Vice Chairperson of CSFB and that, as such, has been
authorized by CSFB to enter into this Order for and on behalf of CSFB.
Dated this 4th
day of September, 2003.
Credit Suisse First
By: s/Gary G. Lynch
Title: Vice Chairman
SUBSCRIBED AND SWORN TO before
me this _____ day of __________________, 2003.
____________________________________________
Notary Public
My Commission expires:
____________________