Putting the Pump in 'Pump and Dump'
Deception was the name of the game on Wall Street when it came to stock research during the bull market. Or, at least, it was a big part of it.
In reaching a $1.4 billion settlement with 10 big Wall Street firms, securities regulators allege that in their zeal for investment banking fees, research analysts at some firms issued stock reports that were either "misleading," "exaggerated," "unwarranted" or, in some cases, outright "fraudulent."
In all, regulators allege that eight firms, including
Citigroup
(C) - Get Report
,
Goldman Sachs
(GS) - Get Report
and
Merrill Lynch
(MER)
, issued deceptive research reports on at least 35 stocks.
In the settlement documents, regulators support their allegations by including copies of internal emails in which analysts privately question their own public recommendations. Some of the emails indicate that analysts sometimes privately advised an institutional investor or a hedge fund manager to short a stock, even as the analyst was telling retail investors to buy it.
In other instances, regulators allege that analysts felt pressure from investment bankers either to initiate or discontinue coverage of certain stocks.
Here's a chart showing the 35 stocks that regulators allege were the subject of deceptive research, and the firms that peddled the research on those stocks to unsuspecting investors. Also included is an example of the kind of emails regulators used to build their case against each firm. These and other emails are expected to provide ammunition for disgruntled investors in arbitration claims and class-action lawsuits.
Last September, in a related investigation, Citigroup paid a $5 million fine to the NASD to settle charges that its telecom research group, led by former analyst Jack Grubman, had issued "misleading" research reports on
WinStar Communications
. That's why allegations against Citigroup over WinStar were not part of the $1.4 billion global settlement.
Additionally, Citigroup, despite much publicity over Grubman's close contact with top executives at
WorldCom
(now known as
MCI
), was not formally charged with issuing any tainted research reports about the bankrupt telco. However, the settlement documents contain numerous emails showing that Grubman and Citigroup's love for WorldCom were driven by a thirst for investment banking fees.