Rot on the Street: Worse Than You Thought

After all that has been said and written about the duplicity of Wall Street's practices, you might think it's no longer possible to be shocked by new revelations. But it is. In their filings against 10 brokerage houses as part of the global settlement of their probe into analysts' conflicts of interest, federal and state regulators have turned up fresh and surprising evidence that the rot went deeper than even many jaded Street watchers believed. Although the firms agreed to pay $1.4 billion in penalties without agreeing to or denying charges, the documents filed as part of the consent orders paint a damning picture. Among the most egregious revelations:

-- Investment bankers didn't just taint their own firms' research; some supposedly independent reports were bought and paid for, too. In an effort to spark investor interest, firms paid one another for research on their investment banking clients. From July, 1999, to June, 2001, two firms now part of J.P. Morgan Securities (JPM ) made seven payments totaling $1.3 million to get other banks to write reports on companies they underwrote. U.S. Bancorp Piper Jaffray (USB ), Morgan Stanley, Bear Stearns (BSC ), and UBS Warburg (UBS ) made similar deals.

-- Still harbor a belief that at least a semblance of a Chinese wall existed between research and banking? Forget about it. At Chase H&Q, a predecessor of J.P. Morgan Securities, equity research had become so tainted by banking priorities that the head of e-business sent an e-mail on Nov. 22, 2000, to the head of research suggesting investment bankers be included in its research "teams." And the research folks clearly knew the priorities were wrong. At Morgan Stanley, research directors reviewing Internet analyst Mary Meeker acknowledged the hundreds of millions of dollars of banking deals she vetted annually, but as early as 1999 recommended that she focus more on investors. And in her 2001 review, the firm's research director even asked: "Do you want to remain an analyst?"

-- The intertwining reached such an extent that investment bankers and underwriting clients routinely received advance copies of analysts' reports. At Lehman Brothers Inc. (LEH ), for example, bankers reviewed drafts of analysts' research to ensure that they were consistent with investment banking positions. U.S. Bancorp Piper Jaffray provided execs at companies they planned to cover with draft reports that included the proposed rating and target stock price.

-- Perhaps most shocking, the losses suffered by individual investors as a result of misleading research was widely known -- and just as widely ignored. Retail brokers from Salomon Smith Barney (C ) , for example, complained about tainted research, to no avail. In internal reviews of telecom analyst Jack Grubman -- used by superiors in his performance reviews -- Salomon's retail brokers ranked Grubman No. 4 out of 159 analysts in 1999, but last in 2000 and 2001. One broker told superiors Grubman should be fired, while another called him a "crook." "I hope Smith Barney enjoyed the investment banking fees he generated," wrote one, "because they came at the expense of the retail clients."

By Nanette Byrnes, with Emily Thornton, in New York

— With assistance by Emily Thornton

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