States Join Task Force to Probe Brokerages

More than 30 states have joined a nationwide task force investigating alleged conflicts of interest among Wall Street stock analysts in a probe that some say could turn up worse behavior than what Merrill Lynch & Co. was accused of.

A coalition of state securities regulators is probing dozens of additional securities firms, said a spokesman for the North American Securities Administrators Assn. The states are “taking major Wall Street players and dividing them up” for investigation, said California Department of Corporations spokesman Andre Pineda.

The state probes are starting with volumes of material obtained by investigators for New York Atty. Gen. Eliot Spitzer, who alleged that Merrill analysts issued false and misleading stock reports to help the firm win lucrative business handling stocks, bonds and mergers for companies they covered.

One source said the investigations may turn up worse conflicts of interest than those exposed at Merrill, where investigators dug up e-mails that revealed Internet analysts privately describing their choice stock picks as “junk.”

Merrill “was clearly not the worst offender,” said a source close to Spitzer, predicting the attorney general and other securities regulators would publicly disclose additional incriminating evidence against other firms. Merrill agreed this week to pay a $100-million fine to settle Spitzer’s investigation. Merrill officials apologized, but did not admit wrongdoing.

The states are working alongside the Securities and Exchange Commission, the National Assn. of Securities Dealers and the New York Stock Exchange, whose joint investigation of analyst practices was upstaged when Spitzer in April posted online a 30-page affidavit of incriminating e-mails from Merrill executives such as former star analyst Henry Blodget.

Spitzer’s office said it remains the lead investigator for Salomon Smith Barney Inc., where analyst Jack Grubman followed telecom stocks, now one of the market’s most battered sectors. It also is the lead on Morgan Stanley, where Mary Meeker, like Blodget, was among the most prominent bulls on Internet stocks.

Salomon volunteered this week to adopt the same reforms separating analysts from investment bankers that Merrill made as part of its settlement.

Sources said other investment firms also have indicated they are willing to do so.

As the states conduct their investigations, they “absolutely” will obtain e-mails and other confidential communications from the dozens of securities firms under scrutiny, said S. Anthony Taggart, director of the Utah Division of Securities.

Taggart said he’s confident that private communications not turned up by Spitzer can be obtained under state laws governing securities firms. He predicted the investigation, “far larger than any jurisdiction could do on its own,” would unearth and disclose additional analyst conflicts. He noted that although Spitzer didn’t disclose all incriminating evidence against Merrill, he wouldn’t allow the firm to negotiate a settlement that kept it entirely secret.

“From an investor protection standpoint, it would be great if this [conduct] didn’t happen elsewhere,” Taggart said. “But I’m sure we’ll find problems at other firms.”