Brokerages’ Failure to Keep E-Mails Could Hinder Probes

State investigations of conflicts of interest among Wall Street securities analysts are being hampered because many brokerages have failed to saved all employee e-mails, a person familiar with the matter said Friday.

E-mail was one tool New York Atty. Gen. Eliot Spitzer used when he pursued allegations of conflicts at Merrill Lynch & Co. earlier this year.

His evidence, which helped persuade the firm to pay a $100-million fine, included electronic messages by analysts making disparaging comments about companies they publicly recommended.

“Spitzer showed e-mails that were pretty explosive evidence,” said Alan Bromberg, a law professor at Southern Methodist University in Dallas. “The e-mails contradicted what the analysts were saying. Anytime you can turn up bits like that, they can make good prosecution material.”

Six of the largest securities firms, including Morgan Stanley and Merrill Lynch, may be fined as much as $10 million total because they didn’t save all e-mail messages, people familiar with the situation said. The Wall Street Journal and New York Times previously reported the potential fines.

It’s unclear how much missing e-mails will undermine the efforts of the states that are investigating analysts at about a dozen of the largest firms.

Specifically, they’re probing whether firms committed fraud by tailoring analyst recommendations to win investment-banking business.

Rules mandate firms hold on to communications regarding their business for three years. During the first two years they must be readily “accessible,” and for the third year the messages may be kept in a less accessible form.

Spitzer, who’s investigating Morgan Stanley and Citigroup Inc.’s Salomon Smith Barney, is focusing on Salomon analyst Jack Grubman. Spitzer’s office is considering criminal charges against the telecommunications analyst, spokesman Darren Dopp said this week.