Massachusetts regulators file complaint against CSFB

Justin Pope

Wednesday, Oct. 23, 2002 | 9:56 a.m.

BOSTON -- Massachusetts regulators are accusing Credit Suisse First Boston of violating state law and "mocking investors" with "winky-blinky" tactics that blurred the boundaries between its research and investment banking divisions.

The complaint, filed Monday, seeks to break up those divisions and calls for a $1.9 million fine.

Evidence attached to the complaint includes testimony from a CSFB analyst who claims he felt pressure from superiors to improve the rating of a technology stock and not upset the client company.

The complaint also accuses the bank of investing in newly public companies to artificially justify the initial valuation of the stock.

CSFB said the complaint was "riddled with misleading statements and inaccuracies," and said Secretary of the Commonwealth William Galvin had refused to allow the company to provide relevant information.

The company also said it is working with regulators on reforms and has already proposed splitting its investment banking and research divisions.

But Galvin, whose office has collected 400,000 e-mails in its investigation of CSFB, said state action was necessary to jolt the industry and the Securities and Exchange Commission into action.

"We act today because the SEC has failed to act and self-policing has failed to protect the investors of the United States," he said.

Documents in the filing include e-mail exchanges in which various CSFB employees appear to be complaining about being pressured into coverage of Lantronix of Irvine, Calif.

"Once I was in, the bankers acted as a proxy for management and we had to fight to get straight answers from these guys on every single line item," wrote CSFB employee Kevin A. McCarthy in a Nov. 8, 2000 e-mail to colleague Elliott Rogers. "I put my reputation on line to sell this piece of crap calling favors from important clients."

Lantronix spokesman Michael Troncale said "this has nothing to do with Lantronix today" and said the company has completely new management since the time the e-mails were sent.

The complaint also accuses CSFB of investing in new public companies for the sole purpose of "justifying the IPO valuation."

It cites an e-mail from Andrew Greenebaum, an executive at eCompanies.com -- which at the time was considering having CSFB handle its IPO -- to Frank Quattrone, the high-profile head of CSFB's investment banking technology group.

"You also mentioned that FBO (First Boston) can directly invest up to anywhere from $1-$3 million in deals to help justify valuations etc.," he wrote. "This is something we're potentially interested in and I'd like to discuss further with the appropriate person."

The filing also includes 29 pages of a transcript of deposition testimony from an unidentified CSFB analyst who described being subtly pressured to upgrade his rating on Numerical Technologies of San Jose, Calif.

The analyst had indicated to a Numerical executive that he planned to begin coverage of the stock with a "buy" rating.

A few hours later, a superior called to say Numerical CEO Buno Pati had called to indicate his displeasure.

The higher executive, John Hodge, repeated several times that the analyst was free to rate the stock as he saw fit, but the analyst testified that he "inferred" from the call "that I'd get yet another slap on my hand, and to play the safe road I went out with a strong buy against my better inclination," according to the deposition.

The "strong buy" rating implied CSFB expected 25 percent annual growth or more. The stock, which was issued at $14 in 2000, according to the deposition, rose to $35 on the first day and later hit $50 per share. It closed Monday at $3.78 on the Nasdaq Stock Market. A company spokeswoman did not return a phone message seeking comment.