The increasingly global nature of financial markets–and of the Internet itself–means that litigious Americans aren’t the only ones hunting witches. A new, more active generation of shareholders in Europe and Asia is demanding answers. Already, some of Europe’s most eminent firms are caught up in accusations of scandal. Last week shareholder activists announced plans to sue Deutsche Bank for dumping 44 million shares of Deutsche Telekom just two days after one of its own analysts put a buy recommendation on the stock. DT CEO Ron Sommer was also incensed. And a number of European and Asian investors are even turning to Manhattan pit-bull attorney Melvyn Weiss, who is pressing class-action suits against Wall Street banks and tech firms, including a number of European companies. Weiss says he recently met with a law firm in London representing British pension trusts that may want to join the suits. “We’re getting interest from all over the world,” he says.
The company named in 49 of Weiss’s 138 suits is Credit Suisse First Boston, the investment-banking arm of Switzerland’s Credit Suisse Group. Whether or not the suits pan out, CSFB is at the center of the global tech scandal. The firm is under investigation by the SEC, and six of its employees have been cited by the National Association of Securities Dealers for alleged wrong-doing during IPOs. Three brokers who reported to the controversial technology investment banking boss Frank Quattrone were fired in June. The key issue is whether CSFB played fast and loose in its handling of high-tech IPOs. The most damning allegations are that the firm may have inflated its commissions, taking what amounted to bribes from clients who wanted to guarantee themselves a piece of a hot IPO. “Compared to banks like Morgan Stanley or Goldman Sachs, CSFB was the upstart in high-tech IPOs,” says Columbia University professor and securities expert John Coffee. “They went from being nowhere to being at the top of the pack within two years.” CSFB spokesperson Victoria Harmon says that the class-action suits against the bank have no merit, but adds that the new management is “conducting an internal review of the issues raised by regulators.”
There’s little question the investigations will reveal the dizzying era of the tech bubble as a time of rising financial chicanery. Kickback charges are the most legally explosive. Some experts believe that many of the cases involving charges of insider dealing, poor disclosure or even bad management are merely sour grapes. German courts recently threw out one such case against former EM-TV CEO Thomas Haffa. Perhaps the weakest legal claim is that star analysts for banks like CSFB, Morgan Stanley and Merrill Lynch led them astray. Last week a New York judge dismissed a suit accusing celebrity analyst Mary Meeker of hyping stocks for personal gain as “a collection of market rumor.”
Still, real conflicts of interest in the stock-picking game have been exposed as never before. Brokerage firms once made most of their money on commissions. In 1975 commissions were deregulated and began falling. Banks made up the losses by beefing up underwriting services, like managing stock offerings for corporations. Rather than just working to identify solid companies, analysts became a tool to help reel in these clients. And no firm would hire a bank that wouldn’t recommend its stock. “Analysts went from being objective umpires to fervent cheerleaders,” says Coffee.
The pressure rose as the tech market heated up in the 1990s. Over the decade, the ratio of buy-to-sell recommendations rose from 6-1 to 100-1. Wise to this, big investors like pension trusts employ their own analysts to do unbiased research. Many small investors weren’t that savvy. In June an SEC “alert” urged investors not to rely solely on analyst recommendations.
Historically, reform has often followed bust. The United States created the Securities and Exchange Commission to watch the market after the crash of 1929. The British corporate-governance movement was born out of the recession of the early 1990s. The current gloom “will almost certainly result in tougher market regulations,” says Peter Sommer, a senior fellow at the London School of Economics. This fall Britain’s Financial Services Authority will begin enforcing new laws making it easier to convict companies of insider dealing and stock manipulation. The German Economics Ministry is studying a code of conduct that would prohibit not just analysts but also journalists and TV gurus from hyping stocks in which they have a financial interest. Just as the boom spawned a new generation of high-tech entrepreneurs, so the bust has spawned a wiser–and warier–generation of investors.
