Why Credit Suisse Could Dodge a Bullet

Prosecutors may not want to open a Pandora's box on Wall Street

Could things get any worse for Credit Suisse First Boston (CSFB )? The company already has been forced to pay $100 million to settle claims that it overbilled clients for shares in initial public offerings. And regulators have been going through tens of thousands of internal e-mails, probing charges that its research may have been slanted to favor investment backing clients. They're also looking into allegations that the firm's technology banking group, headed by star banker Frank Quattrone, engaged in "spinning"--awarding customers shares in popular public offerings in exchange for future investment banking business.

Now, Massachusetts Secretary of State William Galvin is raising the stakes. Galvin, who has been overseeing a civil investigation into CSFB's practices, has referred the case to New York Attorney General Eliot Spitzer for possible criminal charges, including bribery, in connection with the "spinning" allegations. A CSFB spokesperson said it thinks criminal charges are unwarranted. But Galvin is pushing hard. "The only way you're going to end this kind of practice," he insists, "is to persuade people that they're doing it at the peril of criminal conviction."

Maybe, but making bribery charges stick is a long shot. Prosecutors would have to show that a CEO promised CSFB investment banking business in exchange for shares in hot IPOs, says Columbia University School of Law professor John C. Coffee, a leading securities-law expert. Without that proof, the IPO allocations would be nothing more than a gratuity, much like a ticket to a ball game or a pricey meal.

Moreover, in his earlier investigation of the ties between analysts and investment bankers at Merrill Lynch & Co., Spitzer already proved reluctant to play that level of hardball. While Spitzer declined to comment on the CSFB case, in a Sept. 24 speech in New York, he referred to the $100 million settlement paid by Merrill this year, saying: "We could have indicted, convicted, and destroyed Merrill." But with a greater interest in reforming Wall Street than in shutting firms down, he said, "that would have been insane." A criminal case, adds Spitzer's top investigator, Eric Dinallo, "may not help the average investor."

So if bribery charges are a long shot, what's Galvin's game? In part, he is seeking political advantage by appearing tough on a populist issue. But he is also trying to keep up the pressure on CSFB. Even in the absence of criminal charges, CSFB is hardly out of hot water. The seized internal e-mails are simply too damning, say legal experts. Consider the October, 2000, e-mail from one CSFB technology analyst. In it, he advised a colleague to do the "Agilent Two-Step," an apparent reference to Agilent Technologies Inc (A ) Translation: "That's where in writing you have a buy rating but verbally everyone knows your position," according to the e-mail. CSFB responds that it has been "implementing...systemic changes to strengthen analyst independence."

No surprise, then, that many expect CSFB to be pressured to pay a settlement to make this all go away. But it could well be more substantial than the $100 million Merrill paid. While Merrill settled solely for engaging in questionable research practices, any CSFB settlement could cover allegations involving both research and spinning.

A big payment would hurt CSFB--though it would likely survive. The firm earned a net profit of $61 million in the second quarter and will struggle to break even in the second half, according to Norrie Morrison, an analyst at New York investment bank Arnhold & S. Bleichroeder Inc. But its parent, Credit Suisse, has $2.6 billion in cash.

CSFB is clearly anxious to put all this behind it. The firm says it's cooperating with investigators. Earlier this year, CSFB hired Gary G. Lynch, a former Securities & Exchange Commission enforcement chief, to negotiate with prosecutors and help reform the investment bank. And John J. Mack, a respected Wall Street veteran who recently became co-CEO of Credit Suisse, has been trying to instill a new, more ethical culture at CSFB since being named co-chief executive in July, 2001. For the embattled firm, a resolution to all the investigations can't come soon enough.

By Geoffrey Smith in Boston, with Heather Timmons and Emily Thornton in New York

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