At the height of the ’90s stock boom, some investment banks were searching for a novel way to boost the prospects of their corporate clients.
They apparently found one: securing analyst coverage for the clients by paying rival firms to provide it, according to documents released Monday as part of a landmark legal settlement between regulators and 10 Wall Street firms. The payments to rival firms weren’t disclosed as required by law, the Securities and Exchange Commission alleges.
The documents don’t indicate whether the deals guaranteed favorable coverage. But experts said it’s doubtful firms would pay to be criticized.
The goal was simple.
“They want more analysts and more positive coverage about the stock,” said Jay Ritter, a University of Florida finance professor. “Each incremental bullish recommendation pushes the stock up a little bit more.”
It has become clear in the last year that analysts whose firms do investment_banking business for the companies they cover have a huge incentive to tout the stocks to curry favor with management to win corporate_financing work.
But the documents show that even firms with no direct investment banking ties to a company may have hidden conflicts.
Five of the 10 firms that signed the $1.4_billion settlement with regulators were allegedly involved in such practices. UBS Warburg, now UBS PaineWebber, and U.S. Bancorp Piper Jaffray received such payments, according to the documents. Those two firms, as well as Morgan Stanley, J.P. Morgan Chase & Co. and Bear Stearns Cos. allegedly paid other firms for research.
A Bear Stearns spokeswoman did not return phone calls. The other firms declined to comment.
In one example of undisclosed payments, Morgan Stanley allegedly paid seven rival firms $816,000 in December 1999 to do research on San Jose_based Agile Software Corp., according to the SEC documents.
Experts say the regulators’ disclosures raise questions about the motives of at least some of the client companies. An analyst’s decision to start following a stock is a tacit endorsement of the company and its prospects, said Chuck Hill, research director at Thomson First Call.
But “if you’re going to pay for something and not disclose it, it taints the process right from the get_go,” Hill said. “It’s just another way that investors can say, ‘What was going on here? What kind of games were they playing?’ ”
It’s probable that the idea of paying for coverage originated with the banks as a way to garner business, experts said.
The regulators alleged that in some cases the payments were made at the “direction” of the client companies, although on Tuesday at least two of the companies identified in the documents as doing so – Netopia Inc. and Agile Software – said they didn’t request additional analyst coverage.
Netopia and Agile said they simply compensated the lead underwriters who managed their stock offerings with the usual commissions of about 7% of the deal’s proceeds.
“I was surprised to see our ticker symbol show up in that report,” Netopia CEO Alan Lefkof said.
The Emeryville, Calif., company paid the standard fee to lead investment bank UBS Warburg in its $42_million secondary stock offering of August 1999 and disclosed that payment, Lefkof said, “but if there was a special fee for research, that was without our knowledge.”
In general, he added, “The fee relationships are between the banks, and they should make those disclosures.”
According to the SEC, UBS Warburg paid an undisclosed $150,000 “research fee” to two broker_dealers in conjunction with the Netopia offering.
Agile Software spokesman Rick Browne also said there was no special research fee involved in his company’s December 1999 secondary offering, which raised $435 million through lead manager Morgan Stanley.
“To the best of my knowledge the company did not direct Morgan Stanley to pay other people for research,” Browne said. “It’s news to me.”
Browne said the $816,000 paid to seven banks in connection with the offering was probably earned because “they were in the selling syndicate, helping to distribute the stock.”