Credit Suisse First Boston (CSFB) Stock Research Is the Subject of Regulator's Complaint For Fraud

redit Suisse First Boston (CSFB) has joined Merrill Lynch and Salomon Smith Barney in coming under fire for its stock research reports. The Enforcement Section of the Massachusetts Securities Division recently filed a complaint against CSFB. The complaint alleges that CSFB analysts "disseminated biased, subjective, and compromised research favorable to CSFB investment banking clients, which resulted in the Tech Group producing millions of dollars in investment banking fees for CSFB."

The Structure:

Research analysts at CSFB failed to conduct themselves in a proper fashion. The complaint reads:

The Enforcement Section alleges that contrary to the role of an independent research analyst, which is to make objective and informed judgments about companies based on publicly available information, the research analysts in the Global Technology Group (the "Tech Group") at CSFB worked for and were controlled by the investment banking personnel of CSFB. This reporting structure and complete control resulted in investment banking exerting undue influence on the research analyst to give favorable ratings to companies for which CSFB had done or hoped to do investment banking work.

The Fraud:

According to the Massachusetts securities regulators, CSFB's deception was not innocent. Instead, the complaint alleges that CSFB "purposely misled investors by disseminating into the marketplace fraudulent material misstatements of fact concerning the companies covered by the analysts." Additionally, the complaint alleges that CSFB failed to disclose any of the analysts' conflicts of interest to investors.

Document Destruction:

Finally, the Massachusetts securities regulators contend that CSFB concealed its wrongdoing:

When CSFB feared information concerning how its analysts were required to bow to investment banking clients, CSFB intentionally set out to destroy documentation, which could reveal this to the investing public.

CSFB's Two Unwritten Rules:

The complaint alleges that CSFB's Tech Group investment bankers imposed two unwritten rules for research analysts. Rule Number One was: "if you can't say something positive [about a company], don't say anything at all." Rule Number Two was: "why couldn't you just go with the flow of the other analysts, rather than try to be a contrarian". Research analysts who failed to follow these rules risked losing their jobs. And analysts felt pressured not to downgrade a stock; instead, their job was to "sugarcoat" their reports, according to the complaint.

Stocks Discussed In The Complaint:

CSFB had investment banking relationships with many companies. The Massachusetts securities regulators highlight some of the stocks in its complaint. First, the complaint discusses AOL. In connection with earnings estimates, a research analyst was told that she should not lower her estimates for fear of "pissing off the company", even though she agreed that the company "can't make them".

Two more companies discussed in the complaint are Virata and Pilot Network Services. According to the complaint, CSFB documents show that "clearly the message portrayed [is] that CSFB will maintain a rosy forecast for companies that have entered into investment banking deals for CSFB." One document states that "CSFB Stands by its Clients", touting that CSFB continues its strong buy ratings even in the face of negative information surfacing about a company. The complaint alleges that CSFB failed to disclose to investors its "bias favoring its investment banking clients".

Another stock is Lantronix. The analyst stated that he put his "reputation on line to sell this piece of crap calling favors from very important clients". The complaint further alleges that, "Not only was the Lantronix deal corrupt from the beginning, but rather than have the analyst downgrade the stock, CSFB halted coverage, leaving investors completely in the dark".

Investors beware. No matter how sensitized one has become to reports of Wall Street deception, these allegations appear to strike a new low. But stay tuned. We have yet to hear about several other major Wall Street firms.

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James J. Eccleston is a securities attorney, representing investors as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He is a past co-chair of the Chicago Bar Association's Securities Law Committee, a past chair of its Financial and Investment Services Committee, a registered investment advisor and a licensed securities principal of the National Association of Securities Dealers (NASD). He maintains an informative website at www.FinancialCounsel.com. He is an equity partner with Shaheen, Novoselsky, Staat & Filipowski and can be reached at 312-621-4400.