Broker counters SEC over stock selections

Goldman says analysts shouldn't be held liable

October 11, 2002|By BLOOMBERG NEWS

WASHINGTON - Goldman Sachs Group Inc., which employs 300 analysts covering 2,000 companies worldwide, says researchers shouldn't be held personally responsible for their stock recommendations.

The Securities and Exchange Commission wants analysts to certify the integrity of their research as part of an effort to boost investor confidence after accounting scandals at Enron Corp., WorldCom Inc. and other companies. Goldman Sachs is among a dozen financial-services companies under investigation on suspicion that they recommended stocks to win investment-banking business.

Goldman said the SEC's plan doesn't consider changes made to analysts' reports by their supervisors, which could mean that stock selections and commentary don't reflect the views of researchers. Goldman's position contrasts with those of rivals such as Citigroup Inc., Merrill Lynch & Co. and Credit Suisse First Boston, which have endorsed the SEC proposal.

The certification "of personal views" doesn't take into account the "fact that the firm may legitimately influence the views of the analyst in a report," Goldman Sachs General Counsel John W. Curtis wrote in a Sept. 23 letter to the SEC that became available yesterday.

The SEC proposal should be changed to make analysts certify their work "subject to supervision policies of the broker or dealer applicable to all research published by it," Curtis said.

Goldman Chairman Henry Paulson has been working on a Wall Street plan to end federal and state investigations of securities companies. Congress, the SEC and state regulators, including New York Attorney General Eliot Spitzer, are investigating whether brokerages promoted shares of clients and gave executives shares from initial public offerings to win investment-banking fees.

The shares of securities companies have plunged this year amid the investigations and slumping demand for their services. Bloomberg's Wall Street index has dropped 35 percent. Goldman shares, down 34 percent this year, rose $1.80 to $61.08 on the New York Stock Exchange yesterday.

"Our letter is a legitimate response on the merits to an important proposal, and has no bearing on the SEC's investigations," said Goldman spokesman Lucas van Praag. "It seems bizarre that anyone would criticize us for responding to a letter we were asked to comment on."

Banks have had "difficulty insulating the research analysts from the problems, both real and perceived, resulting from the relentless and sometimes intense pressure" coming from clients, Paulson told the Committee on the Investment of Employee Benefit Assets in Washington, the Financial Times reported yesterday.

Salomon has put the SEC recommendation into effect. Salomon General Counsel Marcy Engel said in a Sept. 27 letter to the SEC that supervision of analysts shouldn't prevent researchers from certifying the accuracy of reports.

"The analyst can properly certify that the research report accurately reflects his or her views, even if those views have changed as part of the supervisory process," Engel wrote.

SEC spokesman John Heine declined to comment.

The SEC has said that its proposal seeks to "bolster investor confidence in the quality of research." The plan "creates an incentive for analysts to examine, even more carefully, the basis and foundations" for their views, the SEC said in its proposal.

The agency's staff will review the letters and decide whether to recommend any changes in the proposal before the commissioners' final vote.

Merrill Lynch agreed this year to pay $100 million to settle an investigation by Spitzer, who released e-mails showing analysts disparaging stocks that they publicly promoted.

Spitzer also released e-mails and memos from Salomon Smith Barney that showed former telecommunications analyst Jack Grubman criticizing investment banking clients while issuing favorable research reports at the behest of Salomon bankers.

This week, Massachusetts regulators uncovered Credit Suisse First Boston e-mails that they said showed the company used analyst recommendations to win banking business.

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