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), Goldman Sachs ( GS) 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.



Wall Street's Dirty Laundry
Firm Stocks Sample Email
Citigroup Focal Communications, Metromedia Fiber, RCN, Level 3 Communications, XO Communications, Williams Communications, Adelphia Business Solutions and AT&T "We lose credibility on (McLeod) and (XO Communications) because we support pigs like Focal."
U.S. Bancorp Piper Jaffray Esperion Therapeutics and Triton Network Systems "Esperion has not met a single milestone that they have laid out since they went public. Everything has slipped."
UBS Warburg Triangle Pharmaceuticals and Interspeed "Triangle is a very important client of (the firm). We could not go out with a big research call trashing their lead product, although we had the feeling the FDA might balk."
Merrill Lynch InfoSpace, 24/7 Media, Lifeminders, Homestore.com, Excite@home and Internet Capital Group "(Lifeminders) at $4. I can't believe what a POS that thing is. Shame on me/us for giving them any benefit of doubt."
Lehman Brothers Razorfish, RSL Communications, DDI Corp., RealNetworks and Broadwing "We bank these guys so I always have to cut the benefit of the doubt."
Goldman Sachs Exodus and WorldCom "Investment banking consideration have prevented me from making a change."
Credit Suisse First Boston Digital Impact, Synopsys, Numerical Technologies, Agilent Technologies, Winstar and The New Power Company "At the time, (the investment banker) informed me of unwritten rule number two: 'why couldn't you go with the flow of the other analysts, rather than try to be a contrarian?'"
Bear Stearns SonicWall, Micromuse, CAIS Internet and Digital River "I have to tell you, I feel a bit compromised today. I have told every client on the phone that they should avoid or short the stock over the last few months. I have been fairly hands-off on (Digital River) primarily because of the banking prospect."
Source: Wall Street settlement documents

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.

If you liked this article you might like

SEC Charges Ex-CIBC Broker

SEC Charges Ex-CIBC Broker

Durus Manager Gets Hard Time

Durus Manager Gets Hard Time

Shift for SAC's Cohen

Shift for SAC's Cohen

New Frontier Holder Selling

New Frontier Holder Selling

PIPE Deal Shines Up Sun

PIPE Deal Shines Up Sun