Goldman Sachs Breaks Wall Street CEO Bonus Record,
Pays Blankfein $53.4M
NEW YORK (AP) — John Mack’s record for the biggest bonus ever paid to a Wall
Street CEO didn’t last even a week. It was smashed by the $53.4 million that
Goldman Sachs gave its chief executive, Lloyd Blankfein.
The bonanza for Blankfein included a cash bonus of $27.3 million, with the rest
paid in stock and options. He took the helm of the investment bank in June[not
bad for half-a-year’s work] after President Bush nominated Henry Paulson to be
The record payday, disclosed by Goldman Sachs Group Inc. in a filing with the
Securities and Exchange Commission on Tuesday, breaks the one set just last
Thursday when Morgan Stanley disclosed that it paid CEO Mack $40 million in
stock and options. Mack, who is 62, rejoined Morgan Stanley 18 months ago to turn
around the company after the ouster of Philip Purcell. Mack’s short-lived record
bested one set in 2005 by Goldman’s Paulson, who was given $38.3 million.
Other than Blankfein, 11 other senior Goldman executives as a group were granted
slightly more than $150 million in shares and stock options. The highest paid
among those were Gary Cohn and Jon Winkelried, who both hold the titles of
president and chief operating officer. They each received $25.6 million in shares
and options in 2006.
Any cash bonuses for the other executives were not mentioned in the filings.
The bonuses come after Goldman reported last week that it had earned the
highest yearly profit in the history of Wall Street. Net profit rose 70 percent to
$9.4 billion on revenue of $37.67 billion. Goldman and other firms have
benefitted from a surging market for takeovers and a strong stock market.
Goldman said last week it had set aside a total of $16.5 billion this year for
salaries, bonuses and benefits. On average, this would translate to$622,000 per
The bonuses come in a year in which Goldman shareholders have benefitted from a
rise of about 58 percent in the company’s share price, the strongest returns of
any Wall Street investment house.
Lehman Brothers Holdings Inc. and Bear Stearns Cos. have said they would pay
about $12 billion in compensation each. Lehman said last week it paid its chief
executive, Richard Fuld, $10.9 million in stock this year…
Merger activity to get even hotter
in 2007, analysts predict
Hot takeover market is expected to get even hotter in 2007
By Dana Cimilluca and Julia Werdigier, Bloomberg News
NEW YORK: As hot as the mergers market is now, it is about to get hotter.
All the variables are in place for acquisitions in 2007 to surpass the record $3.6
trillion this year. U.S. stocks are trading close to their lowest price/ earnings
levels in a decade, data compiled by Bloomberg show.
Yields on the junk bonds used to finance takeovers also are near 10-year lows,
according to Merrill Lynch. Leveraged buyout firms have $1.6 trillion to spend,
Morgan Stanley estimates.
“There hasn’t been a period I’ve seen in my career when all of those factors that
influence M&A activity have been as strong,” said Stefan Selig, the global head of
mergers and acquisitions at the securities unit of Bank of America.
The conditions have never been even close to what they are now, said Felix
Rohatyn, a longtime investment banker who spent half a century at Lazard Frèresand now works as an adviser to the chief executive of Lehman Brothers Holdings,
Bank of America, Morgan Stanley, Deutsche Bank and J.P. Morgan Chase all
forecast that takeovers may climb at least 10 percent next year. An increase of
that magnitude would raise fees from advising companies and buyout groups to a
record $24 billion, according to estimates based on Bloomberg data.
Goldman Sachs Group, Morgan Stanley, Lehman and Bear Stearns may need the
extra fees to keep profits growing after they earned a record $23 billion in 2006.
Merrill, which rounds out the top five, is to report its financial results next month.
In the United States, more than $170 billion of deals were announced this month.
Vodafone Group,Barclays and Air Liquide are among the European companies
whose shares gained this year on speculation that they might be takeover targets.
Anglo American, a mining company with a market value of £36.5 billion, or $71.5
billion, also may be bought, UBS analysts wrote in a note to clients Dec. 15.
The last time the backdrop for mergers and acquisitions was anywhere near as
favorable was in the late 1980s, when the former junk bond chief at Drexel
Burnham Lambert, Michael Milken, was helping finance hostile takeovers, and U.S.
stocks lost$500 billion of market value in the crash of October 1987.
Even then, 10-year U.S. Treasury yields were about twice the current level of 4.59
percent, making it more expensive to pay for deals. Only five buyout firms had
investment funds of more than $1 billion, Morgan Stanley research shows. Now, 115
have at least that much to spend.
“The financing markets today are much more robust,” said Frank Yeary, global
head of mergers and acquisitions at Citigroup, which advised on eight of the 10
biggest deals this year, including AT&T’s$83 billion takeover of BellSouth.
“There are many more, and larger and deeper pockets of money.”
Private equity firms are driving the increase in deals to heights never before
seen. Blackstone Group, Carlyle Group and Kohlberg Kravis led leveraged buyout
firms in announcing $735 billion of purchases this year, almost triple the amount
announced in 2005.
The companies have about $409 billion of combined equity to invest and can raise
$1.2 trillion in non-investment grade bonds and loans, according to Morgan
Stanley. David Rubenstein, co-founder of Carlyle, this month predicted a $100
billion leveraged buyout in the next two years.
Demand for high-yield debt is making it easier for buyout firms to finance
acquisitions. About $473 billion of leveraged loans were issued this year, up 60
percent from 2005, Standard & Poor’s estimates. Sales of junk bonds increased
50 percent to $199 billion, Bloomberg data show.
“If you look at the state of the credit markets, the increase in corporate earnings
and the buying power in private equity hands, it could well be another record year,”
said Dennis Hersch, chairman of mergers at J.P. Morgan.
Companies in the S&P 500-stock index have increased profits by at least 10
percent for 13 straight quarters, the longest stretch since the 1950s, according to
data from Thomson Financial.
Because stock market gains have not kept up with earnings growth, the average
P/E multiple for companies in the S&P 500 fell to 16.5 in July, the lowest in 11
Goldman was the No.1 mergers and acquisitions adviser for a sixth straight year in
2006, working on more than $1 trillion of deals, according to Bloomberg data.
Citigroup ranked second, followed by Morgan Stanley, J.P. Morgan and Merrill. UBS
is sixth, Credit Suisse is seventh and Lehman is eighth.
In 2007, the biggest increase in merger volumes will probably be in Europe and
emerging markets, said Paulo Pereira, a London-based partner at Perella Weinberg
European mergers increased 49 percent this year to $1.69 trillion, outstripping
growth in the United States for the third consecutive year, Bloomberg data
show. In the United States, the biggest market with $1.7 trillion of deals, the
volume of takeovers rose by 37 percent.
“Europe still has some adjustments to do as part of the process of liberalization of
the European economy,” Pereira said. “The corporate landscape is adjusting to
trends that other areas like the U.S. have already adjusted to.”
In Asia, takeovers probably will be driven by leveraged buyouts and bank mergers
in Taiwan, said Angus Barker of UBS.
“The drive of strong corporate balance sheets and supportive equity market
valuations will remain intact going into 2007, so we anticipate another strong year
for M&A in the region,” Barker said.
The pace of buyouts in Australia and Japan may “spill over” into other parts of
Asia, he said.
Bank of New York Settles U.S.
Inquiry Into Money Laundering
By Timothy L. O’Brien, New York Times
Federal prosecutors said yesterday that the Bank of New York agreed to pay $38
million in penalties and victim compensation in a deal stemming from a six-year
investigation of fraud and money laundering involving suspect Russian and
American bank accounts and other fraudulent transactions.
Prosecutors said the bank, one of the nation’s oldest, did not adequately monitor
and report suspect accounts at the bank.
The bank agreed to make what prosecutors described as “sweeping internal
reforms to ensure compliance with its antifraud and money laundering obligations.”
Authorities sad that the bank has “accepted responsibility for its criminal
conduct” and that it will not be prosecuted as long as it complies with the terms of
the deal for three years.
Bank of New York also agreed to allow an independent examiner to monitor its
The investigation, which began in 1998 and ended last year, first became publicly
known in the summer of 1999 when Russia’s pell-mell rush to privatizeformerly
state-owned assets resulted in widespread criticism of insider dealsand possible
corruption amongRussia’s business elite and officialsof the Kremlin.
The fine, which is among the largest ever assessed against an American bank for
money laundering violations, consisted of $14 million for failing to supervise
suspect Russian accounts and $24 million for a separate series of fraudulent
activities involving a branch on Long Island.
Riggs Bank, a subsidiary of the Riggs National Corporation, paid $41 million in
federal penalties this year and last to settle a high-profile investigation of money
laundering problems at that institution.
Prosecutors withe the United States attorneys’ offices in Manhattan and Brooklyn
noted that the money laundering scheme at the Bank of New York involved
unlicensed transmissions of about $u billion that originated in Russia, passed
through American accounts, and then moved into other accounts worldwide.
Authorities said that at least nine individuals, including a former Bank of New York
vice president, had been convicted for their roles in the two cases.
The Bank of New York acknowledged in the settlement that it had failed to
adequately police and intentionally failed to report suspect accounts at the bank.
Moreover, according to the settlement, the bank’s general counsel, managing
counsel, and other senior executives repeatedly ignored requirements to report
illicit transactions until authorities began arresting suspects in its investigations.
The agreement also said that the Bank of New York subsequently provided
incomplete reports about suspect activities and failed to report separate
transactions that resulted in the defrauding of other banks – even though the
Bank of New York had already reached an agreement with regulators to overhaul
its troubled monitoring operations.
“We are satisfied that reaching this agreement is in the best interest of our
company and all of our constituents,” the bank’s chief executive, Thomas A. Renyl,
wrote in a statement. “We are taking the right steps in today’s environment to
ensure sound business practices.”
Two Russian emigres – Lucy Edwards, a former vice president at the bank, and her
husband, Peter Berlin – originally opened the suspect accounts at the bank in 1996.
The couple pleaded guilty to fraud charges in early 2000, conceding that they
helped two Moscow banks conduct illegal operations through Bank of New York
In 1999. the Bank of New York suspended Natasha Gurfinkle Kagalovsky, a senior
executive who oversaw Ms. Edwards. Federal investigators were exploring Ms.
Kagalovsky’s possible role in the money laundering scheme at the time and she
subsequently resigned from the bank and moved to London. she has never been
charged with wrongdoing in connection with the investigation….
Ms. Kagalovsky’s husband, Konstantin Kagalovsky, served in secure government and
corporate posts in Russia. He once worked for two large companies, Menatep and
Yukos, which the Russian billionaire Mikhail Khodorkovskyformerly controlled.
Mr. Khodorkovsky, once one of Russia’s most prominent and powerful figures, was
convicted in Moscow in May on fraud and tax evasion charges in a highly disputed
case pitting him against the Kremlin.
J. Michael Shepherd, who was general counsel at the Bank of New York during
the money laundering investigation, left the bank last year to become general
counsel of the BancWest Corporation.
He did not return a telephone call seeking comment.
New York— More than 300 companies that staged hot initial public offerings
during the tech boom agreed to pay investors $1 billion to settle allegations
they were complicit in schemes by investment banks to rig stock
sales to benefit themselves and favored customers.
Under the tentative settlement announced Thursday, the 309 companies also
agreed to cooperate in the continuing case against 55 brokerages accused of
making secret deals for coveted shares and artificially inflating the prices.
The massive case involves hundreds of lawsuits filed by investors over IPOs
between 1998 and 2000, issued by such former high-flyers as theglobe.com,
Global Crossing, MP3.com, Ask Jeeves and Red Hat.
The proposed settlement guarantees that plaintiffs will receiveat least$1
billionfrom the tech companies’ insurers, said Melvyn I. Weiss, chairman
of a committee of attorneys representing the investors. The class, which has not
been formally defined, will cover any investor who bought shares at the time of
the IPOs or in the aftermarket, up until Dec. 6, 2000, he said.
“This covers everybody who lost money. Most of our lead plaintiffs are just
ordinary people who are investors,” he said.
Settling with the companies — who plaintiffs say knew or should have known about
the alleged misconduct — will strengthen the investors’ position as they negotiate
with the banks, Weiss said.
“We have always been of the mind that the primary target in this
case is the underwriting community,” Weiss said. “This gives us a huge
booster shot in our case against them.”
The plaintiffs are looking to recover“many billions” of dollars from the
investment banks, Weiss said. The firms, including J.P. Morgan, Credit
Suisse First Boston, Merrill Lynch and Smith Barney, are accused of
plotting to artificially inflate the value of IPO stocks through a practice called
“laddering,” which involves doling out shares to investors based on their
commitments to buy additional stock after trading begins.
In addition, some customers who invested in IPOs were compelled to give extra
compensation to the banks, sometimes through inflated commissions on other
trades. Later, after the so-called “quiet period” that follows IPOs, analysts who
worked for the banks issued favorable research to fluff up the
stocks, whether they were worthy or not.
As part of the settlement, the tech companies have agreed that any claims they
might have against the investment banks will be assigned to the plaintiffs’ class.
Their cooperation may also help speed the discovery process, Weiss said.
“They participated in road shows, they had conversations with the underwriters,”
Weiss said. “They may have been misled as to what compensation the underwriters
were receiving. … all of this is important to us.”
Most of those involved have approved the settlement, Weiss said, which also must
be approved by the court.
No funds will be paid to investors until the case against the banks is resolved,
however. If more than $1 billion is recovered from the banks, the tech companies’
will not have to pay anything, the lawyers said. If the award is more than $5 billion
dollars, the tech companies and their insurers will be able to recover expenses.
The settlement was reached after more than a year and a half of negotiation
between lawyers for the investors, the tech companies and at least42 primary
insurers. Attorneys involved agree it is among the most complicated cases in U.S.
“This is by far the most complex securities litigation that has ever been brought,
and the settlement process is equally complex,” said Jack Auspitz, a lawyer with
Morrison & Forester, who represents 30 to 40 of the internet companies.
NEW YORK, Nov 26 (Reuters) – Regulators are telling Wall Street firms that they
face fines as high as $500 million in order to resolve analyst conflict of
interest probes, a source familiar with the matter said on Tuesday.
Regulators expect to tell Citigroup(C) that it will have to pay $500 million to end
a probe into whether its analysts misled investors with tainted research in order
to please investment banking clients, the source said.
Regulators have told Credit Suisse First Boston that it will have to pay $250
million to settle the probes.
Bear Stearns Cos. Inc. (BSC), Goldman Sachs Group Inc. (GS), J.P.
Morgan Chase & Co. (JPM), and UBS Warburg are to be told or have been
told that will have to pay $75 million each, the source said.
Regulators will tellThomas Weisel Partners that it must pay $60 million and
Morgan Stanley (MWD) that it must pay $50 million, the source said.
Regulators will not require Merrill Lynch & Co. Inc. (MER) to pay any amounts
in addition to the $100 million it has already agreed to pay as the result of a
settlement with regulators earlier this year, the source said.
NEW YORK, Nov 18 (Reuters) – Five securities firms have tentatively agreed to
pay $8.3 million in fines for allegedly failing to keep emails and produce them in
regulatory investigations, the Wall Street Journal reported in its online edition on
Monday, citing people familiar with the matter.
Goldman Sachs Group Inc, Morgan Stanley, the Salomon Smith
Barney unit of Citigroup Inc, the U.S. Bancorp Piper Jaffray unit
of US Bancorp, and the securities unit of Deutsche Bank AG —
each plan to pay about $1.65 million to settle the expected civil
charges without admitting or denying wrongdoing, the newspaper said.
A regulatory group led by the Securities and Exchange Commission, the
National Association of Securities Dealers and the New York Stock
Exchange had warned the firms of the possible fines at a meeting at the SEC in
late July, the Journal said.
The formal filing of the case alleging books-and-records violations could come as
early as next week, people familiar with the matter said, according to the
newspaper report. . . .
K-Mart is closing 284 stores and laying off 22,000 workers without
severance pay – and yet in 2001, K-Mart Chief Executive OfficerChuck
Conaway walked away with a golden parachute worth at least$9.5 million – on
top of total 2000 compensation that topped$29 million.
K-Mart is not an isolated example. While a typical company’s corporate profits
declined by 35 percent in 2001, corporate chiefs pocketed 7 percent more in
median salaries than the previous year. At the same time, CEO’s have risk-proofed
their own retirement and job security, while workers are more vulnerable than
Here are some other stories of CEO’s and what they did to their
companies and their workers.
>> GE has not contributed to it’s workers’ pension plan since 1987 – and the plan
added $1.5 billion back to GE’s earnings in 2001. In addition to 2001 compensation
of $16,246,772, former CEO John Welch, Jr.stands to receive a pension benefit
of nearly$10 millionevery year for the rest of his life!
>> Coca-Colacut 5,200 jobs and the value of Coke workers’ 401(k) plan has
fallen in half. CEO Douglas Daft got the earnings targets on his restricted
stock grant reduced after he failed to meet is promised performance goals. His
total 2001 compensation was $105,186,644.
>> By the end of 2002, if it spins off its recently acquired cable business, AT&T is
expected to employ 75% fewer workers than it did in 1984. CEO C. Michael
Armstrong will get a new employment contract and has a $10 million floor on his
restricted stock. His 2000 compensation totaled $27,730,943.
>> Tyco International has eliminated 11,000 jobs as it closed or consolidated more
than 300 plants. CEO Dennis Kozlowski and his chief financial officer have chased
out half-a-billion dollars in shares and stock options on top of salaries and
bonuses totaling almost $22 million over the past three years.
>> Hewlett-Packardwill cut 15,000 jobs as the result of its merger with Compaq.
CEO Carly Fiornia Forina took home nearly$15 million in 2001 compensation and
gets a new employment contract….
$ $ $
September 20, 2002
bank loan ‘‘tying’’
Practice forces borrowers to sign up for investment banking
By Jathon Sapsford, THE WALL STREET JOURNAL
Sept. 20 —— The National Association of Securities Dealers said it is
investigating a widespread but controversial banking practice in which loans to
companies are made only if the borrowers agree to give the lender lucrative, fee-generating investment-banking business.
WHILE LAWS formally prevent banks from initiating such an arrangement, known
as tying, many banks have found loopholes to the laws. During the soaring stock
market of the 1990s, when investment-banking was generating huge commissions
for banks that underwrote securities or advised on enormous mergers, such
quid-pro-quo arrangements were widespread….
The multipronged investigation is likely to focus on one of the most routine ways
big lenders get around existing laws against tying.The Bank Holding Company
Act Amendments of 1970forbids a bank from tying loans to other
businesses. But banks often side-step this rule by booking loans at an affiliate,
such as a securities unit or a bank-holding company.
In the past, tying has been extremely difficult to prove, and banking regulators
and private sector regulatory lawyers saythey can’t recall a single instance
of a tying case brought by bank regulators…
“We are receiving reports and hearing concerns from some of our members that
the practice of tying commercial credit to investment banking is becoming more
widespread,” said Robert Glauber, chairman of the NASD.
“As underwriting and [initial public stock offering] business remains
low, the temptation to generate business by tying increases.”
The NASD declined to identify the institutions it is looking into. But the
institutions likely to come under scrutiny include three of the nation’s largest
lenders —J.P. Morgan Chase & Co., Citigroup Inc. and Bank of
America Corp. — that also have large and aggressive investment-banking
The NASD said its investigation indicated that the tying of commercial-bank loans
to investment-banking services occurs most commonly in scenarios involving
so-called bridge loans, which are short-term loans companies rely on while they are
awaiting the proceeds of bond sales; backup credit facilities that support a
company’s issuance of commercial paper; and syndicated loans.
“Access to these types of credit at commercial rates is critical to many companies
and may provide a bank with the opportunity to require a company to purchase
additional investment-banking services, such as investment-grade debt
underwriting,” the NASD said.
The NASD said it is also concerned that tying may occur with other services, such
as pension management.
Tying is the latest point of contention for a financial-services industry under
scrutiny for a number of conflicts, including the close ties that bank and
brokerage analysts have with the companies they cover. The tying issue
surfaced in recent months as the economy slowed and credit became scarce, giving
lenders leverage over the cash-starved corporations who need loans.
Bankers, defending their lending practices, counter that it is often borrowers who
ask that bankers provide loans in exchange for thefat fees they pay when hiring
their banks to underwrite securities or provide merger advisory. There are no laws
baring banking clients for demanding that banks provide one service at the expense
Whoever is driving the practice, banks like Citigroup and J.P. Morgan have
made strides in stealing some of the investment-banking business from their Wall
Street rivals, by many accounts because they offer loans as well as
But that has come at a cost for some banks. J.P. Morgansaid earlier this week
that its third-quarter earnings would suffer from$1.4 billion in losses
related to loans that had gone bad. Most of those loans were extended to
companies in the telecommunications and cable industries, once considered
high-growth prospects promising to yield their bankers lucrative
investment-banking fees as they expanded their businesses.
The fact that lending and investment banking are becoming increasingly linked has
captured the attention of legislators only three years after Congress repealed the
Glass-Steagall Act, the last vestige of Depression-era laws thatformally
separated banking, brokerage activity and insurance.
Rep. John Dingell, a Michigan Democrat, questioned regulators’ grasp on potential
tying violations in a July letter to Federal Reserve Board Chairman Alan Greenspan
and Comptroller of the Currency John D. Hawke Jr. In an Aug. 13 response,
Messrs. Greenspan and Hawke said their staffs are conducting a “special targeted
review of the tying issue at several of the country’s largest banks” and will take
“appropriate supervisory action” if necessary.
NEW YORK – Three former Tyco International executives were charged
yesterday with looting the conglomerate of hundreds of millions of dollars. The
charges were the latest move by prosecutors against alleged thievery in America’s
Manhattan District Attorney Robert Morgenthau said former chief executive L.
Dennis Kozlowski, and former, chief financial officer Mark H. Swartz directly
stole more than $170 million from the company and obtained $430 million through
fraudulent securities sales.
Kozlowski, 55, and Swartz, 42, were charged criminally with enterprise corruption
and grand larcency. Former general counsel Mark Belnick, 55, was charged with
falsifying business records to cover up$14 millionin improper loans from Tyco….
STAMFORD, Conn. — Xerox Corp. said it reversed about $1.9 billion of revenue
that it recognized over previous years, a move that will reduce revenue 2% to $91
billion for the 1997-2001 period.
THE COMPANY said it reversed $6.4 billion of previously recorded
equipment-sale revenue, which was offset by $5.1 billion of revenue that it
recognized and reported during the same period as service, rental, document
outsourcing and financing revenue. Also, Xerox reversed $600 million in lease
revenue that it received before 1997, a company spokeswoman said.
Shares of Xerox slid 17%, or $1.39, to $6.61 in morning trading on the New York
Stock Exchange. . . .
The SEC’s April complaint had accused Xerox of having“misled and betrayed
investors” with a wide-ranging scheme to manipulate its earnings
and enrich top executives.
Most of the charges revolved around Xerox practices that improperly accelerated
revenue from long-term leases of its copiers and other office equipment.
At that time, the SEC had estimated that Xerox’s accounting tricks accounted for
as much as 37% of pretax earnings during certain quarters.
The agency said the accounting scheme helped keep Xerox’s stock
price artificially high in the late 1990s, with the result that
executives could cash in more than$5 millionin performance-based
compensation and more than$30 millionfrom stock sales….
Research probe could cost Merrill
NEW YORK, April 24 (Reuters) – Merrill Lynch & Co. Inc. (MER), under fire
for allegedly biased stock research, could wind up with a tab of $2 billion in a
worst-case scenario outcome of a regulatory investigation, a Prudential
Securities analyst said on Wednesday.
“We estimate that the (New York) State Attorney General investigation could
ultimately cost Merrill Lynch as much as $2 billion,” analyst Dave Trone said in a
research note. “A caveat is that our estimates for three of the four consequences
are ‘worst case’.”
New York State Attorney General Eliot Spitzer earlier this month accused
Merrill of tailoring its research to woo investment banking business, after he dug
up e-mails passed around by former star analyst Henry Blodget’s Internet group,
showing that analysts privately disparaged stocks they publicly touted.
Merrill agreed to disclose potential conflicts of interest on its stock reports, but
it is still negotiating with Spitzer on the size of a possible settlement payment and
changes it will make in the operation of its research department.
Following New York’s lead, other investigative bodies became involved in the Wall
Street research probe on Tuesday.
Securities regulators from several states said they formed a multi-state task
force to investigate Wall Street firms for possible securities law violations in
issuing misleading stock research. Spitzer is co-chair of the national task force,
along with the New Jersey and California state attorneys general.
Merrillhas enlisted former New York City Mayor Rudy Giuliani, who
initially gained public attention through his investigations of
securities traders and racketeering, to help deal with Spitzer’s
“Merrill Lynch has hired Giuliani Partners to advise on all aspects of a resolution,”
a Merrill spokesman said. “The issues presented in this matter are complex and
require a complex understanding of the market system.”
Spitzer has also subpoenaed most of Wall Street’s biggest firms, including Morgan
Stanley (MWD) and reportedly Goldman Sachs Group Inc. (GS) and Credit Suisse
First Boston, which have declined to comment on the matter.
FOUR POTENTIAL CONSEQUENCES
There are four potential consequences of Spitzer’s 10-month probe, Trone said.
These include a nationwide financial settlement, which, he said, could cost as much
as $1 billion. The Changes to Merrill’s research procedures, which Trone said could
cost $30 million, and $500 million in lost profits from client defections are two
other consequences in addition to the settlement costs.
Civil lawsuits that result from the regulatory findings could cost $420 million,
Trone said, calculating there is a 1 percent chance Merrill would lose such a case
and multiplying that percentage by Merrill’s total market value.
“We believe Merrill has virtually no chance of losing to plaintiff suits in court,”
Trone said. It will be too hard for plaintiffs to prove they relied solely on Merrill’s
research to make the investment decisions that lost them money, he said.
A total of $2 billion is steep, but Trone noted that Merrill lost $4.4 billion in
market value in the 10 trading days after April 8, when Spitzer announced the
Despite the potential costs, Trone maintains his market rating of buy on Merrill
shares. . . .
Enron Shareholders’ Suit to
List Banks, Brokerages
Class-Action Filing Seeks to Take Aim at Wall Street Tactics
With Potential Conflicts of Interest
By David S. Hilzenrath and Peter Behr, Washington Post
Several of Wall Street’s most prominent banks and brokerages played a crucial
and deliberate role in Enron Corp.’s fraud on investors, lawyers for Enron
shareholders allege in an expanded class-action lawsuit they plan to file today.
The lawsuit seeks to put Wall Street practices on trial, including the potential
conflicts that investment banks face in recommending the stocks of companies
that pay them fees.
Enron’s “house of cards” would have collapsed much earlier if it had not been
propped up by investment banks and brokerages, the suit alleges. Enron in
December sought Chapter 11 protection in the nation’s largest-ever bankruptcy
Financial institutions named as defendants in the lawsuit include J.P. Morgan
Chase & Co., Citigroup Inc., Credit Suisse First Boston USA Inc., Bank of
America Corp., Merrill Lynch & Co. andLehman Brothers Holding Inc. . . .
The lawsuit also targets two law firms that worked for Enron or a related
partnership: Vinson & Elkins LLP and Kirkland & Ellis. In statements, the law firms
said they did their jobs properly.
The suit reflects the Enron shareholders’ quest for deep pockets to cover the
billions of dollars they lost when the Houston energy trader collapsed. In
November, Enron disclosed that, since 1997,it had overstated profits and
Initial lawsuits aimed at Enron executives and directors and the company’s
longtime auditor, Arthur Andersen LLP, which put its stamp of approval on the
company’s false financial statements. Andersen’s ability to pay damages, however,
appears to have been reduced by an exodus of clients. The accounting firm is
fighting for survival and defending itself against a federal indictment for
destroying Enron-related records.
Andersen’s negotiations with Enron shareholders continued over the weekend, past
a midnight Friday deadline, and sources close to the litigation said some progress
The amended suit alleges that, with inside knowledge of Enron’s vulnerable
financial condition, major financial institutions issued analyst recommendations
that encouraged investors to buy Enron stock, provided loans that propped up the
company, helped Enron hide the extent of its borrowing, and underwrote Enron
securities offerings through which the investing public paid down corporate debts.
Attorney William S. Lerach of the firm Milberg Weiss Bershad Hynes & Lerach
LLP, lead counsel for the shareholders, briefed reporters yesterday on the suit
after providing draft copies of the document.
Banks “structured and/or financed” Enron’s off-the-books
partnerships, at times helping them carry out bogus transactions,the suit says.
Banks also“played an indispensable role in helping to inflate and
support Enron’s stock price,”the suit says.
As a reward, “banks and/or their top executives”were allowed to
invest in one of Enron’s key partnerships, where they stood to
profit from self-dealing transactions with Enron, the suit says.
“Secret or disguised transactions byJ.P. Morgan, Citigroup and CS
First Boston alsoconcealed billions of dollars of loans to Enron,”the
For example, the suit alleges that J.P. Morgan used an entity it controlled in the
Channel Islands, Mahonia Ltd., to issue loans to Enron that were disguised as
trades of natural gas futures contracts. The transactions concealed more than$3.9 billion of debt that should have been reported on Enron’s balance sheet,
the suit says.
Recognizing the risk that Enron would default, the suit says,J.P. Morgan took
out insurance on the contracts. Since Enron’s bankruptcy,the insurance
carriers have refused to pay, arguing that the trades were
A federal judge last month refused to compel the insurers to pay, ruling that
“these arrangements now appear to be nothing but a disguised loan.”. . .
Senate committee points to possible
conflict of interest
by Marcy Gordon, Associated Press
WASHINGTON – Wall Street analysts who recommended Enron stock as the
company slid toward bankruptcy testified yesterday they were not influenced by
their own firms’ investments and had seen no signs of serious trouble.
It was the first time financial analysts, whose advice is heeded by investors
nationwide and whose firms give millions in campaign donations to lawmakers, were
called to account for their role in the Enron debacle.
“It now seems clear that too many analysts failed to ask ‘why?’ before they said
Sen. Joseph Lieberman, D-Conn., chairman of the Senate Governmental Affairs
Committee, said at a hearing at which four analysts from big investment firms
Ten of 15 analysts who followed Enron were still rating it as a “buy” or “strong buy”
as late as Nov. 8, two weeks after the Securities and Exchange Commission
announced it had opened an inquiry into the energy-trading company’s accounting.
“It appears we were misled” about Enron’s financial condition, testified Anatol
Feygin, a senior analyst at J.P. Morgan Securities Inc.
After Enron chief executive Jeffrey Skilling resigned abruptly last August,
analysts were told in a conference call that nothing negative was happening or was
anticipated, said Curt Launer, managing director of stock research at Credit
Suisse First Boston.
And independent analyst, Howard Schilit, told the senators his review of Enron’s
financial statements found numerous problems that should have been noted by
analysts covering the company.
Federal Reserve Chairman Alan Greenspan said yesterday thatwhen
investigators collect all the evidence they will find that Enron’s collapse was
triggered by financial markets’ sudden loss of confidence in the company.
“Enron is a classic case of a company whose market value is very significantly
dependent on the reputation of the firm,” he told the House Financial Services
Committee in response to questions . . .
Although analysts’ compensation may not have been linked to their stock
recommendations, several senators said a potential conflict of interest exists
because of the investment firms’ profitable business ties with companies their
Analysts, who earn an average of about $200,000 yearly, often receive bonuses
based on overall profits of their firms, which depend in turn on the ties with the
companies the analysts follow. The four appearing at yesterday’s hearing said they
get bonuses on that basis.
Some of the analysts also went briefly “over the wall” from the research to the
investment-business side of their firms to work on projects.
“You have an appearance problem,” Sen. George Voinovich, R-Ohio, told the analysts
from Wall Street powerhouses J.P. Morgan, Lehman Brothers, Credit Suisse
First Boston and Citigroup Salomon Smith Barney.
Several big investment firms lent money to Enron, invested in its
partnerships, bought Enron stock and recommended it to investors.
Now they face hundreds of millions of dollars in losses on the
loans. . . .
Fight back against anti-competitive corporate mergers,
unfettered free trade, downsizing, declining wages and
Downsizing & Corporate Relocations
According to outplacement firm Challenger Gray & Christmas, companies cut more
jobs in July 2001 than in any month since they started keeping track of layoffs in
Corporations announced a record 205,975 job cuts for July 2001 alone, bringing
the total number of lost jobs for the first seven months of the year to just under
What newspaper articles are not saying is that it is unregulated corporate actions
that has caused the economy to go into the dumpster. But maybe even the media
titans are starting to worry. The New York Post ran a photograph of “unemployed
men on a soup line during the depression of 1934”, with the bold type asking “Is
this the future?” [New York Post, 8/7/01, page 30]
* * *
Tyco International Ltd., a diversified conglomerate employing 220,000 people,
purchased 7 firms for a total of $17 billion during the 9 month period ending June
30th. As a result of these acquisitions, they closed 58 facilities and cut 6,400
jobs — presumably because they were “redundant” workers. Tyco plans to
eliminate an additional 2,000 workers. Although the company is managed from
Exeter, New Hampshire, their “official” headquarters is in Bermuda. [Wall Street
Journal, 8/14/01, page A6]
* * *
Companies are closing customer service centers in the United States and moving
the jobs to India, where the workers are paid about $2,400 US per year. The
customer service reps don’t tell their American callers that they are really located
in India. “Companies that outsource to India would prefer to keep that under
wraps”, reports S. Mitra Kalita in Newsday [7/15/01, pages F1, F6-F7].
* * *
It isn’t just customer service jobs being moved to India, either. Computer
programmers are being laid off by the thousands in the United States with the
work being moved to India. Programmers in India are paid about $5,000 US per
year, and receive almost no benefits. Comparable programmers in the United
States earn at least $50,000 US per year. According to Clive Thompson in
Newsday, “database giant Oracle has announced that it would be investing $50
million to expand its Indian offices.” He also reported that Hewlett Packard is
boosting its staff in India from 1,500 to 5,000.
As Mr. Thompson so eloquently stated, “Eventually the United States won’t
make any hard goods, won’t do the cerebral stuff and won’t fulfill the orders.
Then, what’s left? Brand building? Business development? Shopping? Would you
like fries with that, sir?” [Newsday, 7/15/01, page B15]
* * *
The American flag flies high outside the corporate headquarters of Symbol
Technologies, Inc. in Holtsville, NY. But even though the sales of their products
are booming, as many as 700 jobs are being eliminated in the United States. An
increasing amount of production is going to be handled at the company’s plant in
Reynosa, Mexico. [Newsday, 5/4/01]
Then, less than 3 months later, Symbol Technologies announced that it was laying
off an additional 1,000 workers and closing 9 distribution facilities to consolidate
them all in the cultural wasteland of McAllen, Texas. It also reiterated its decision
to move all high-volume manufacturing to Mexico and the Far East. [Newsday,
7/27/01, page A51]
* * *
The USX-U.S. Steel Group is closing the Fairless Works steel mill near
Philadelphia, with 600 people losing their jobs as a result of “an increase in foreign
imports”, according to the Wall Street Journal. These job loses were “permanent”,
said a USX spokesman. [Wall Street Journal, 8/15/01, page A2]
* * *
United Services Automobile Association (USAA), an insurance and financial
services firm, just announced that it would be cutting 1,370 jobs (almost 6% of its
workforce). Most of the jobs cut will be at USAA’s San Antonio, Texas
headquarters. [New York Times, 8/9/01, page C4]
$ $ $
June 24, 2003
West Virginia sues Wall St. firms, seeks $300 mln
By Kristin Roberts
MIAMI, June 24 (Reuters) – West Virginia’s attorney general said on Tuesday he
filed suit against 10 Wall Street firms, claiming relationships between banking and
research departments represented an illegal conflict of interest under state law.
The complaint filed by Attorney General Darrell McGraw comes two months after a
record $1.4 billion global settlement with those same firms following New York
Attorney General Eliot Spitzer’s probes of stock research by Wall Street
West Virginia seeks more than $300 million in damages based on its Consumer
Credit and Protection Act. The state is suing on behalf of residents who may have
made investment decisions based on what it said could be biased research issued
by the firms’ analysts.
The firms are Bear Stearns Cos. Inc. (BSC), Credit Suisse unit Credit
Suisse First Boston, Goldman Sachs Group Inc. (GS), Lehman Bros.
Holdings Inc. (LEH), Citigroup’s (C) Citigroup Global Markets, J.P.
Morgan Chase & Co. (JPM), Morgan Stanley (MWD), Merrill Lynch
Cos. Inc. (MER), UBS unit UBS Warburg, and the Piper Jaffray
unit of U.S. Bancorp (USB).
Seven of the firms reached on Tuesday said they had no comment on the case. The
others were not available.
Fran Hughes, deputy attorney general, said West Virginia was not asking the court
in this case to force the firms to eliminate or alter any of their practices. Rather,
West Virginia was seeking only monetary penalties.
“We just want them to pay for all the losses that they’ve intentionally caused,”
The state also claims two of the 10 Wall Street firms engaged in “spinning,” the
practice of giving top corporate clients access to hot initial public offerings of
Under the West Virginia law, any unfair, deceptive or dishonest act directed at or
affecting a state resident is punishable by a fine of up to $5,000 per offense. The
attorney general said there could be “hundreds of thousands” of violations in this
May 31, 2002
Why Is Washington Ignoring
The Warning Signs Of Economic Devastation?
By Arianna Huffington, AlterNet
Hindsight— it’s all the rage in Washington. But though the story of the missed
terror warning signals is eating up all the headlines, there is another story of
warning signs being ignored by our elected officials that’s getting hardly any ink at
all, even though these signs are multiplying at an alarming rate.
Here are a few of them:
In the last two years, 433 public companies— including Enron, Global
Crossing, and Kmart — have declared bankruptcy.
Two million Americans have lost their jobs.
Four trillion dollarsin market value has been lost on Wall Street.
And each day brings a fresh, stomach-turning revelation of the rampant corruption
infecting corporate America. Despite these ominous flashing red lights, it now
appears almost certain that no real reform legislation will come out of Congress
before the November elections.
Think of that. After the outrage generated by Enron, Arthur Andersen, Merrill
Lynch, and all the other corporate scumbags undermining the modern private
enterprise system, the end result will be a continuation of the rotten status quo.
And that means fresh disasters down the road. Yet we have the information to, as
the phrase of the moment goes, “to connect the dots” right now.
It’s a textbook case of special interests triumphing over the public interest. In
other words, unless you’re reading this in your executive boardroom, you’ve lost
again. In this case, the biggest winners are those veteran Washington arm-twisters, the powerful — and very well-funded — accounting and financial services
That’s right, the same folks who helped bring us this mess by relentlessly chipping
away at the rules and regulations governing their industries are now ensuring that
any efforts to clean things up will be thwarted. And lest we forget, the problem is
that much of what is being done isn’t illegal but should be. Otherwise, the manic
appetite for profits will continue to inspire Wall Street’s rats to squeeze through
The latest example of their sinister handiwork is the sudden shelving of Sen. Paul
Sarbanes’ accounting reform bill, a muscular measure that would strengthen the
SEC, restrict accounting firms’ ability to double-dip as consultants and auditors
for the same client, and impose stringent conflict of interest rules on the
investment banking world.
Instead, the bill is in a deep coma and not expected to survive, having been
pummeled within an inch of its legislative life by a goon squad made up of finance
lobbyists and their No. 1 Senate enforcer, Phil Gramm.
First, the lobbyists brought out the rhetorical brass knuckles, issuing an “Action
Alert” that Sarbanes’ bill would result in a “de facto government takeover” of the
accounting profession and “serious, harmful consequences for capital markets and
The warning on a pack of cigarettes is less alarmist. Then Gramm pulled out his
copy of Robert’s Rules of Parliamentary Obstruction and went to work, pressing
Chairman Sarbanes to hold more hearings on the bill — even though the Banking
Committee had already held 10 hearings on the matter since Feb. 12 — and
offering 41 last minute amendments. Fellow Republican committee members added
another 82 amendments for good measure — a few extra kicks in the gut of the
It was democracy at its worst. The full court pressure worked. Sarbanes put the
bill on ice and retreated to lick his wounds. When I called for his reaction, I was
told he wasn’t talking to the press. Why not? He should be speaking out to anyone
who will listen and hitting the talk shows with his condemnation of those knee-capping his efforts. Where is his indignation over Gramm’s bullyboy tactics?
It should come as no surprise that, according to the Center for Responsive
Politics, the accounting industry has already doled out $5.2 million in 2002
campaign contributions — with $293,196 of that going to 16 of the 21 members of
the Senate Banking Committee, including $37,500 to Gramm, and another
$52,497 to Mike Enzi, who have cosponsored a highly diluted, industry-approved,
next-to-useless alternative to the Sarbanes bill.
It was this generous spreading of financial manure that doomed an earlier effort,
led by then SEC Chairman Arthur Levitt, to bar accounting firms from serving as
both incorruptible auditor and smarmy sales help for the same company. Had
Levitt’s measure passed, it very well could have removed the tempting apple that
Enron used to corrupt Arthur Andersen.
And by the way, it’s not just Republicans dancing to the accountants’ tune. Sen.
Chuck Schumer, the senior Democratic senator from New York, and among those
who spearheaded the opposition to Levitt’s proposal, has received $438,431 from
accounting firms since 1989.
It was this financial industry lobbying muscle that over the last decade pushed
through legislation gutting so many of the regulations designed to bring
accountability to our complex free market system: the Private Securities
Litigation Reform Act, whichmade it much harder for investors to win lawsuits
against corporations; the Financial Modernization Act, which demolished the
barriers that had kept investment banks out of commercial banking since the
Great Depression; and the Commodity Futures Modernization Act, which gave usunregulated trading of derivatives and made the Enron debacle possible.
Meanwhile the White House seems less than eager to put a reform bill on the
president’s desk. Apparently, the post-Enron panic that inspired the president to
propose a 10-point plan that included a reform of accounting standards has
subsided. Or maybe the administration’s current do-nothing posture has something
to do with the embarrassing revelation this week that the SEC has begun an
investigation into whether Halliburton, under Dick Cheney, used questionable
accounting practices to pump up its bottom line.
“Once the excitement and the glares fade,” accounting industry lobbyist John
Hunnicutt said of reform efforts on the Hill, “people really start to think about it.”
Translation: he and his friends are keeping all their fingers and toes crossed that,
“once the excitement and the glares fade,” people will forget about the lies, the
fraud, the cooked books, the document shredding and just lose interest. . . .
It looks like they just might get their wish. “It is unlikely,” Sen. Jon Corzine, a
Banking Committee member championing reform, said this week, “that we will get
strong reform unless there is a new event that captures the public imagination.”
You mean the largest corporate bankruptcy in history and the parade of corruption
that has followed weren’t big enough?
That’s like saying that Sept. 11 wasn’t enough — that we have to wait for the next
horrific attack before we get serious about taking on terrorism (which,
unfortunately, seems also to be the case).
Do we have to wait for another 433 companies to go belly up, and two million more
Americans to lose their jobs, before our leaders heed the warning signals and make
passing the post-Enron reforms a top priority?
How about a little foresight to go along with the heaping helping of hindsight
Washington is serving up?
Alas, the guidelines for ‘social investing’ ignore a thing or
two. Last year they’d have led you to Enron,
as a ‘good energy’ company. Oops.Socially responsible investors — both you and your mutual fund — have a new issue
to confront. How do you handle the ethical swamp that’s turning up at the heart of
some of America’s “cleanest” stocks? As a matter of principle, social investors buy
only progressive companies that respect the community, treat workers fairly and
conserve the environment.
ALAS, THESE GUIDELINES ignore a thing or two. Last year they’d have led you to
Enron, as a “good energy” company. Oops.
Anyone can be taken in by fraud, but the problem for white-hat investors turned
out to be larger than that. A stock may pass the traditional social-responsibility
tests and still outrage one’s moral sense. You don’t want to own a company willing to
cook its books or manipulate energy prices, no matter how nice it is to its
employees. . . .
Social investing emerged from the stew of civil-rights marches and protests
against the Vietnam War. The movement’s first mutual fund, Pax World, debuted
in 1970—promising no defense, nuclear power or “sin” stocks (gambling, alcohol,
tobacco). It sought environmentally savvy firms that hired women and minorities.
Next came the fight against South African apartheid and social investing caught
on. Today, Morningstar counts 119 social funds, managing more than $13 billion (see
socialinvest.org, for some names). If you add institutional and private money,
social investors may control more than 12 percent of the managed assets in the
United States. . . .
When I spoke with fund managers last week, I found them thinking about this
problem but not sure how to quantify it. … How do you recognize the risk of
duplicity in a company whose social report card shows gold stars?
One hard fact some funds are considering is CEO pay and perks. Over-the-moon
compensation seems linked with companies that inflate their earnings. . . .
Funds are also looking what the company pays its auditing firm…That raises a
question about how independent the auditors are, when their firms have that much
money at risk….
The big question about social funds has always been how they perform. As usual,
some shine while others don’t.
The former Citizens Index Fund leaned heavily toward tech stocks and got killed
when the bubble burst. It remade itself as a big-cap growth fund and is trying
again. Ariel, on the other hand, has been doing fine.
The entire social-investing group does as well as the market. Now they have to get
better at finding truly white-hat stocks.
TOKYO, June 17 (Reuters) – The Japanese unit of Goldman Sachs Group Inc
(GS) said on Monday it had met all tax obligations in Japan and declined to
comment on media reports that said it had failed to report some income by
transferring funds overseas.
Japanese media reports said on Sunday that seven Japanese affiliates of
the U.S. securities giant failed to report a total of five billion yen
($40.24 million) in income in Japan….
Jiji news agency and the Mainichi Shimbun newspaper on Sunday quoted
unidentified sources as saying that the tax authority imposed an additional tax of
some 1.5 billion yen, including penalty taxes, on the Goldman Sachs group firms
after searching their premises for evidence.
The seven firms purchased bad loans, along with real estate assets put up as
collateral, from Japanese banks at low prices, and transferred some of those
assets to a dummy company in the Cayman Islands, a tax haven, Jiji said.
The Japanese affiliates also transferred the proceeds from related transactions
to a Goldman Sachs group company in the Netherlands, effectively evading tax
payments in Japan, Jiji quoted sources as saying.
“There are structures that have money going outside of Japan. But there was no
wrongdoing and we complied with Japan’s tax regulations,” Camargo said.
There were similar reports last month about top investment bank Morgan Stanley
Japanese media reports said the U.S.-based property fund run by Morgan avoided
paying tax in Japan on 18 billion yen in income by funnelling money through Dutch
Morgan said it believed it had met all tax obligations in Japan and that it had no
current dispute with Japanese tax authorities.
The reports said the Tokyo Regional Taxation Bureau had concluded that the
Morgan’s fund had used a loophole to reduce its profits on transactions involving
Japanese real estate by using “dummy” companies in the Netherlands.
Strike three for Halliburton came this week when a third asbestos
case in as many months went against the oil giant. Funny thing is,
Halliburton does not, nor did it ever produce asbestos. Those who did
have largely gone bankrupt, leaving the plaintiff’s bar to look for deep
pockets that have even tangential connection to the cancer-causing
agent. Investors are going to continue to have difficulties accurately
pricing in this risk for companies like Halliburton and Sealed Air.
By Bill Mann (TMF Otter)
It’s been a tough couple of months for Texas.
First, Houston’s economy gets shelled due to the collapse of Enron (NYSE: ENE),
replete with layoffs by the thousands, suddenly unneeded “in-process” real estate,
and a loss of paper wealth among its citizens in the billions of dollars. Then
Dallas-based oil services giant Halliburton (NYSE: HAL) suffered a 40% drop in
share price after it disclosed that its asbestos litigation liability may be
“materially more than previously expected.” That 40% represented about $5
billion in market value.
Plus, the Houston Astros flailed in the baseball playoffs, the Dallas Cowboys can’t
beat anyone whose name doesn’t rhyme with “Mashington Wedskins,” and the
University of Texas biffed a chance to play for the national championship in
college football. When the fortunes in oil and football are going the wrong way in
Texas, you know a lot of people there are not at all pleased.
Halliburton’s woes are not, however, related to either oil or football. They are
from litigation from asbestos, a flame retardant material that, as it turns out,
causes amongst other things, mesothlioma, a deadly form of cancer. Asbestos
use peaked in the U.S. in the 1970s, though some experts say deaths from
asbestos-related illnesses are not expected to crest until 2010. Therein lies the
beginning of the problem for Halliburton and other companies with asbestos
litigation risk: With diseases that can take more than 20 years to develop after
exposure, no one has any idea how much the eventual claims will be, or when they
Here’s where it gets strange. As it turns out, Halliburton, which has in the last
three months lost three court verdicts with liabilities at about $125 million, isn’t
and has never been involved in asbestos. Instead, Halliburton merged with a
company, Dresser Industries, in 1998, more than a dozen years after Dresser had
been involved with asbestos. However, Halliburton’s merger with Dresser came
with the assurance that Dresser’s liability for claims was insured. But since the
insurer has no means to cover claims, the responsibility to pay goes right back to
Halliburton, which has money and assets to spare.
That’s right. Halliburton is on the hook for potential asbestos litigation for being
in the wrong place, and having a whole lot of money. It doesn’t really seem fair, but
then again, neither is it fair to the victims of nasty diseases brought upon by
exposure to asbestos fibers. Aristotle called the law “reason free from passion,”
so really whether or not treatment of Halliburton is deemed fair by the general
public matters not at all.
Why not sue the companies who produced the asbestos in the first place, you say?
Well, for one thing, more than 25 companies, including USG (NYSE: USG), W.R.
Grace, (NYSE: GRA), and Owens Corning (NYSE: OWC) have already filed for
bankruptcy due to massive asbestos-related liabilities.
Other companies have some unknown asbestos liabilities as well. Sealed Air (NYSE:
SEE) held a conference call to comfort investors that its asbestos liability has not
changed and were inconsequential and that all cases against the company “are
inactive pending the disposition of the Grace bankruptcy.”
Sealed Air, like Halliburton, has never had any asbestos operations. In Sealed Air’s
case, it purchased a division of W. R. Grace. When Grace filed for Chapter 11,
two committees representing asbestos-related claimants filed motions with courts
to pursue Sealed Air as being successively liable. The company believes that the
chances of this happening are slim, but admits that quantification of claims against
it should its defense fail is impossible.
There are a couple of lessons here. First of which is that no one is safe from the
plaintiff’s bar, but that is not so much an investment issue as it is a reality of
living in these United States.
The second issue is that uncertainty can murder stocks. Do you think that
Halliburton’s 42% drop had to do with the potential payout of $30 million? The
company might have $30 million in its petty cash drawer. Halliburton has had done
to it what Philip Morris (NYSE: MO) was feeling in 1999 (and may still be today):
when investors cannot quantify a known and realized threat, they will assume
the worst. . . .
How Wall Street’s storied
Chinese wall failed investors
By Richard J. Newman and Peter Basso, U.S. News & World Report
On Wall Street, there are bulls and bears. And now––well, now there are
With the collapse of the tech sector and the nose dive in the Dow, regulators,
shareholders, and lawyers are baying for blood. Investigators from the Securities
and Exchange Commission and the Department of Justice are examining whether
questionable––and maybe criminal––behavior occurred at some of the top-tier
underwriting firms that fueled the white-hot market for initial public offerings
from 1998 to 2000.
“I am deeply troubled by evidence of Wall Street’s erosion of the bedrock of
ethical conduct,” said Republican Rep. Richard Baker of Louisiana last week at
congressional hearings. “Our first goal . . . is to begin a process of rebuilding
confidence in the market.”
That’s why the Securities Industry Association unveiled a new code of ethics for
Wall Street stock pickers last week. The new rules are designed to prevent
analysts from thinking of self-gain or their bosses’ approval when they make “buy”
or “hold” calls. But for many investors, the push for “integrity” comes way too
late. Some of the same folks who once sued for access to IPOs are now joining
class action suits, claiming they were swindled by Wall Street analysts working
both sides of the Chinese wall that once separated brokers from their
counterparts on the research side.
Through May, 105 such lawsuits had been filed, according to Stanford Law School
Scandals about hot new issues are nothing new on Wall Street, of course. For over
40 years, regulators have tried to tame the misconduct that inevitably follows
speculative surges in the market for new offerings. It’s not quite like clockwork,
but roughly once a decade for the past 40 years there’s been a nasty round robin
of IPO bubbles, scandal, investigation, and efforts at reform. Here we go again.
IPO markets –– the quickest way to get rich on Wall Street -– can spawn the
seediest kinds of white-collar crime:
Picture boiler rooms where fast-talking sharpies dump artificially inflated
shares on widows and orphans. Testimony in a stock-fraud case portrayed
Steve Madden, the renowned shoe designer, forking over $80,000 in a brown
paper bag at a country club in Roslyn, N.Y., to a partner in a scheme to
manipulate IPOs and share the trading profits.
But the latest kerfuffle constitutes the biggest IPO investigation yet, an ugly coda
to the most highflying new-issues market in history. At the epicenter is Credit
Suisse First Boston, the firm that underwrote more IPOs than any other over the
past two years. Under fire, CSFB has put three brokers on leave. At least six
other employees are under investigation by regulators. The firm says it’s
cooperating with investigators but insists its practices are in line with others in
Other underwriters under the microscope: Goldman Sachs, Bear Stearns, Merrill
Lynch, Morgan Stanley Dean Witter, and Salomon Smith Barney. All are
defendants in shareholder lawsuits.
Writ large, the issue is basically one of conflict of interest. Did professional
investors investing on behalf of wealthy clients pay kickbacks in the form of
abnormally high commissions to get in on the hottest offerings?
The motivation would have been strong: At the height of the boom, IPOs were
soaring far above their offering prices, allowing those first in line to reap huge
windfalls by selling shares quickly after the offering. To initiates, the practice is
known as “flipping.”
In the Nasdaq’s heyday, a good flip could yield millions of dollars––overnight.
Evidence? Total profits earned on the difference between the offering price and
the first day’s closing price for IPOs in 1999 totaled some $35 billion, says
finance Prof. Jay Ritter at the University of Florida. That’s more than in all prior
years––combined. And everyone, it seems, was in on the action. Last week, the Wall
Street Journal reported that six members of Congress flipped IPO stocks,
claiming one-day profits as high as 414 percent.
The line between reasonable business practices and illegal deals is murky, say
experts. Unless you’ve paid a bribe for the privilege, flipping is not only legal; it’s
also great for a money manager’s investors. “By and large, we take the allocations
we get and make money on flipping,” says the general counsel of one giant mutual
fund company. “I tell my managers it’s their duty to the client.” Likewise,
commissions are negotiated and might be higher than usual for valid reasons. “It
doesn’t smell like a criminal case,” says a former criminal prosecutor. “There’s a
sophisticated buyer, a sophisticated seller, and no poor victim.” Says Baker, who
chaired last week’s congressional hearings: “It is one thing for one shark to eat
another. It is quite another thing for the shark to eat the minnows.”
Meet minnow Bruce Gavin.
“I’m not in this because I’m whining and I lost a few dollars in the market,” the
50-year-old computer engineer from Sacramento, Calif., says. Gavin, a plaintiff in a
lawsuit filed against PlanetRx.com and six of its IPO underwriters, says he lost
$10,000 on shares of the failed online drugstore. “I’m in this,” he says, “because
there’s been serious trading based on news that’s only available on the inside or to
preferred customers.” The minnows, in other words, didn’t get a shot at
flipping––and wound up buying at inflated prices.
Dozens of class action suits have been filed by shareholders alleging violations
of both securities and antitrust laws. In a suit against MarketWatch.com and six
of its IPO underwriters, lead plaintiff Phillip Walsky of Wayne, N.J., claims the
firm issued “false and misleading” information in its prospectus to pump up the
stock price. The suit also accuses Credit Suisse and other underwriters of seeking
to “surreptitiously extract inflated commissions.” When the first 2.75 million
MarketWatch shares sold on Jan. 14, 1999, they rocketed from $17 to as high as
$130, ending the day at $97.50. The shares now trade near $3. Other suits make
similar claims against a list of former Internet darlings, such as Marimba, Red
Hat, and VA Linux.
Sell high. The firms insist the suits are without merit. And there are legitimate
questions about whether the entrepreneurs who sought IPOs for their young
companies are the victims of IPO abuses––or the perpetrators. Entrepreneurs
selling coveted shares to the market wouldn’t necessarily want underwriters to
pass so much money to outsiders, when that money might instead go to the
“Issuers bought into the mantra of the IPO as a marketing event,” explains
Ritter. “They were choosing underwriters based on the fact that a well-known
analyst would be touting their stock.” The reason? Months after the IPO ––
when restrictions on corporate sales expired –– corporate officers could then
cash in their own shares at steep profits.
Pressure on investment bank analysts to issue upbeat ratings on the stock of client
firms is often intense, recalls one analyst who used to cover natural gas firms for a
major Wall Street house. “We had seven people covering 55 companies, and we
were expected to have buys on every one of them,” he says.
Resurrecting a Chinese wall between the research and investment banking
departments now tops the agenda in Washington and on Wall Street (box). The
guidelines issued by the Securities Industry Association last week call for more
safeguards against touting suspect stocks. Further reforms are likely to require
investment banking firms to disclose how they dole out IPO shares and ban
kickbacks or tie-in arrangements.
Until then, Wall Street’s IPO machine is humming away quite nicely, thank you.
Last week, investors scarfed up 280 million shares in the Philip Morris spinoff of
Kraft, netting $8.68 billion for the parent company and its underwriters. CSFB
managed the offering, and together with Goldman Sachs it will lead the $3 billion-plus IPO later this year for AT&T Wireless Services.
Business as usual.
< < < FLASHBACK < < <
June 5, 1997
Hong Kong –– Growing Economic Fears
From Pacific Rim, Managing Editor: Antonio Tambunan
Hong Kong people’s fears about the future escalated as they gave the
Government’s economic stimulus plan the thumbs down, sending the stock market
tumbling more than 3% on Monday of this week. . . .
The bureau said the regional turmoil was making things worse: tourism numbers,
down sharply since the handover, hit the retail sector; and unemployment was
at its highest in 14 years.
”Locally, our situation was not helped by the dismissal of staff by some
established companies amidst warnings of more lay-offs and the collapse of
some businesses,” the bureau said in its report on the survey, which was carried
out between May 11 and 15.
Financial Secretary Donald Tsang Yam-kuen said on Friday that the
Government’s 1998 growth forecast of 3.5% was ”unattainable”, but gave no
revised GDP estimates, saying the situation was too uncertain to predict.
In response to the slump, the government scrapped anti-speculation
measures in the property market, acted to improve bank liquidity
and moved to boost tourist numbers.But stock brokers said the market
felt the plans were too little, too late.
… And the Merger Mania Continues …
Travelers Group will buy a 25% stake in Nikko Securities for 220 billion yen
(about US$1.59 billion), the biggest foreign investment to date in Japan’s rapidly
opening securities industry. Travelers will buy 70 billion yen worth of Nikko shares
and 150 billion yen of convertible bonds, the companies said in a joint statement on
Monday. Nikko will buy an unspecified number of Travelers shares. Nikko, in a
separate release, said it would issue 154.2 million new shares at 436 yen per share
to be sold to Travelers on August 28.
Travelers will also form a joint venture in Japan with Nikko to be called Nikko
Salomon Smith Barney. Nikko will own 51% and a Nikko executive, Yuji Shirakawa,
will be the chairman. Travelers’ investment banking unit, Salomon Smith Barney,
will own 49%, and its head in Tokyo, Toshiharu Kojima, will be the chief executive
officer. The new company will start with 140 billion yen in capital.
Nikko Salomon Smith Barney will open in January. It will underwrite stocks and
bonds, do large-lot securities trading, advise on mergers and acquisitions, produce
economic research and develop derivatives and other financial products. Through
the deal, Travelers will gain better access to 1,200 trillion yen of financial assets
held by Japan’s avid savers. It could lure some of that from individuals, who keep
60% of their financial assets in bank deposits yielding less than 1%.
Travelers, which agreed in April to merge with Citicorp to form the world’s
biggest financial company, will become Nikko’s largest shareholder and the
first major foreign investor in Japan’s top three brokerages.
The purchase is the latest in a string of foreign forays into Japan’s newly
deregulated financial industry. Industry leaders are encouraging the infusion
to help them overcome a seven-year economic slump and a series of scandals.
In March, Merrill Lynch & Co took over branches and hired thousands of
employees from Yamaichi Securities after the firm, Japan’s fourth-largest
brokerage, went bankrupt.
Goldman, Sachs & Co, Fidelity Investments, and HSBC Holdings also forged
alliances with Japanese banks last month.
Indonesia –– First Family Fortune Probed
Attorney-General Sujono Atmonegoro yesterday announced he was investigating
the wealth accumulated by ousted president Suharto’s family. . . ..
Pressure by prominent government critics to probe the wealth accumulated by
relatives of Mr Suharto has mounted since he resigned on May 21. Mr Suharto’s
half-brother Probosutejo said recently that the former first family would reveal
their assets if formally requested by the attorney-general’s office. . . .
The attorney-general declined to comment on the size of the fortune believed to
have been amassed by the former first family, estimated by some media reports at
about US$40 billion.
Meanwhile, the Indonesian military has set a schedule for the court-martial of
19 soldiers suspected of opening fire on a peaceful student protest at Trisakti
University in Jakarta on May 12, killing four students. . . .
The finding followed a probe into the shooting by a military team set up by armed
forces chief General Wiranto after Mr Suharto stepped down May 21.
The shootings triggered widespread riots which left 500 dead in Jakarta. . . .
Hoping to free up jobs for Thai workers, police yesterday launched a crackdown on
200,000 illegal workers believed to be living in and around the capital.
Immigration authorities said they hoped workers would voluntarily leave the
country, as required by a June 1 deadline set by the Government, but threatened
to arrest and deport those who refused.
The majority of the illegals come from Burma to work on construction sites.
Others are from equally poor neighbours Cambodia and Laos. A random check of
four police stations revealed only a few arrests.
The action in Bangkok comes a month after a crackdown began in the provinces,
spurred by Labor Ministry expectations that sending the illegal workers home
would create jobs for Thais.
But employers in several industries – among them fishing and construction –
said Thais would not perform dirty or poorly paid jobs. Border and fishing
provinces that depend on cheap foreign workers have successfully lobbied for
exemptions from the drive. . . .
$ $ $
When it comes to right-on, Texas-style, tell-it-like-it-is plain talk, nobody is
better at it than Jim Hightower. The following take on Wall Street is from his
book, If the Gods Had Meant Us to Vote, They Would Have Given Us
THE FLO CHART
Flo is a waitress at the Dine & Go Diner, where she works an early breakfast shift,
six to nine.
Then she goes downtown to the law offices of Meager, Wages & Miser, where she’s
a “legal aide” … doing grunt work ten to four for a bevy of insurance company
lawyers. Ironically, Flo doesn’t have insurance.
She does have a couple of great kids, though … and she considers them her real
job, though she’s stretched mighty thin on time and energy and wishes she was
with them more frequently.
She’s also taking a couple of night courses at the community college, trying to get
ahead. To know how the nation’s economy is doing, we don’t need to consult some
trumped-up confidence index or the ethereal Dow Jones average but the Flo
How’s Flo doing?
Hers is the heartbeat of America’s majority— the 80% of folks who are paid less
than $50,000 a year, the 60% who don’t own any stocks and bonds, the 75% who
don’t have a university sheepskin hanging on the office wall . . . and the two-thirds
who aren’t voting because neither party is fighting for Flo.
The economic elites try to fool Flo by pointing to the glittering stock market; the
media elites try to fool Flo by pointing to their smiley-faced consumer reports; the
political elites try to fool Flo by pointing to the 20 million jobs created in the
nineties. So why isn’t Flo fooled? Because, to determine her economic situation,
she analyzes data that the elites ignore. . . .
Flo’s leading economic indicator is called “Income.”
When you’re alone at your kitchen table doing calculations like that, it’s hard to be
fooled by a distant chorus telling you that you’re doing great. … With important
exceptions like [Ohio Rep. Jim] Traficant, politicians of both parties gloat about
America’s amazing “job-creating machine,” and the media cheerfully parrots
industry’s claim that so many people are now at work that they can’t find
applicant’s for all kinds of jobs, from low-tech hamburger flippers to high-tech
computer code writers.
For employees and job seekers, however, the issue is not getting a job (Flo has
two), but getting a job that offers middle-class basics— decent income, health
care, vacation time, and pension….
You want statistics? . . . In real dollars, average hourly wages in 1973 were $13.61.
Today they average $12.77. Far from gaining from the “Boom,” American workers
are paid less today than when Richard Nixon was president! . . .
The 25-year decline in the Flo Chart almost exactly tracks the 25-year rise in the
Democratic Party’s fealty to Wall Street money. As the party’s congressional,
White House, and campaign officials bonded tighter and tighter with the
corporate and financial elites, they distanced themselves further and further
from Flo . . .
The fact that Flo is being pounded economically is not a case of benign neglect but
of the Democrats joining the Republicans to support policies that mug her, stealing
her middle-class aspirations by aggressively holding down her income.
Let me be blunt: Low wages are the official policy of the U.S. government.
If you’re a manufacturer wanting to hold down wages here at home, the
government will book you on a trade delegation to Asia, hook you up with a
contractor that provides workers for as cheap as fifteen cents an hour,
underwrite your foreign investment, suspend tariffs and quotas so you can ship
your cheap-labor products to stores back here, and put out a press release saluting
you for joining in a private-public partnership to foster “global competitiveness.”
If you’re a minimum-wage employer, don’t worry about any rabble-rousing populism
from Democrats— they’ll give you a wink as they hold any increases to a level way
below poverty. Even at the higher wage levels, if you’re a Microsoft, IBM, or
Silicon Valley giant and want to put a drag on the salaries of your engineers,
programmers, and other high-tech workers, count on the Democrats to join
Republicans in helping you import an extra 50,000 or so of these workers each
year from Pakistan, Russia, and elsewhere, letting you pay them a third to a half
less than U.S. workers, thus busting the American salary scale.
And if wages do show any sign of creeping up, count on Uncle Alan to step in and
stomp on them.
Alan Greenspan, as chairman of the Federal Reserve Board, is the ruling authority
over our nation’s monetary policy, and he hates wage increases. You see, if wages
rise, they might possibly pinch corporate profits ever so slightly, and this might
spook your big Wall Street investors, causing the high-flying stock prices of
corporations to slip a notch.
Since today’s upper-class prosperity is built almost entirely on the bloated prices
of those corporate stocks, both parties are determined that nothing should spook
these investors, even if this means keeping Flo down. . . .
Both parties have made the same choice— Greenspan, first appointed by President
Reagan and reappointed by Presidents Bush and Clinton, has been their bipartisan
hit man on Flo. There’s no relief in sight for the poor lady, either, since both
Democrat Gore and Republican Bush have signaled that they want Uncle Alan back
for yet another term. . . .
Greenspan uses the Fed’s power over interest rates to hammer Flo, much like some
clod might use a sledgehammer to swat a fly. At the slightest hint that it’s
possible sometime in the future for wages somewhere to rise … Greenspan
pounces. . . .
Last summer the cold-eyed, pursed-lipped Greenspan openly urged Congress to
bring in more immigrants, using them as wage-busters: “I have always thought … we
should be carefully focused on [what] skilled people from abroad and unskilled
people from abroad … can contribute to this country. . . . If we can open up our
immigration rolls significantly, that will clearly make [wage inflation] less and less
of a potential problem.”
Add to Washington’s wage-busting policies, that delight that Wall Street takes in
corporate downsizing, and you have a surefire formula for holding wages (and
people) down. The politicians who talk so loud and lovingly about America’s job-creating machine go mute on the topic of America’s job-destroying machine . . .
Challenger, Gray & Christmas is a highly regarded employment firm that tracks job
cuts daily, and it reports thatcompanies have been eliminating some 64,000 jobs
a month, most of which are the higher-paying jobs that come with health care,
pensions, and vacation time.
It gets little media coverage, but downsizing in the late nineties has been more
rampant than it was in the 80s and early 90s, when it was a major media story and
led to Clinton’s ‘92 presidential victory.
Remember his slogan, “It’s the economy, stupid,” and his pledge to create “good
jobs at good wages?”
Instead, he learned that if he just laid low, like Brer Fox, while corporations
punted those jobs, Wall Street investors would cheer lustily and run up the stock
price for the companies doing this “streamlining,” then the media would focus on
the lightning flash of the Dow Jones average, and he would get credit for presiding
over a thunderous, stock-driven boom. . . .
$ $ $
INSIDERS DON’T SWEAT COLLAPSE
by Michael Perkins and Celia Nunez
“LONG BEFORE THE STOCK MARKET WENT INTO THE TOILET, THE BIG
BOYS GOT OUT.”
Last March, the tech-heavy Nasdaq index reached a staggering 5048, prompting
venture capitalist John Doerr to claim that we were witnessing “the greatest-ever legal creation of wealth in the history of the world.”
This week, the Nasdaq fell below 2000. Someone is out a lot of money, and that
someone is primarily the small retail investor. Why? Because the insiders–
entrepreneurs, venture capital firms, investment banks and large institutional
investors– pulled out their capital long before the fall, leaving mom-and-pop
investors holding the bag.
Instead of the greatest-ever legal creation of wealth, the high-tech financial
bubble represented the greatest-ever legal transfer of wealth– from retail
investors to insiders.
For example, between November 1998 and July 2000,Goldman Sachs, Morgan
Stanley Dean Witter and Credit Suisse First Boston each pocketed more than
$500 million in underwriting fees from Internet companies. And over the past two
years, technology underwriting as a whole brought in close to $1 billion for each
bank. . . .
Some insiders would argue they, too, have been hurt by the market’s decline. And
in fairness, it should be noted that not eery insider pulled out early. … But the fact
is, not all stock losses are the same, because the insiders get their stock for
pennies a share, if that.
Thus, while an insider may have seen his portfolio slip from $50 million to $5
million, he probably paid only $100,000 for his stock, so he’s still ahead in terms of
But when individual investors see their stock portfolios plummet, it’s real.
The TRUTH is, little investors never stood a chance, because they simply don’t
have the same access, both to key information and to early deals, as big investors.
One reason is the “quiet period” mandated by the Securities and Exchange
Commission, which requires a startup company to shun any publicity regarding its
finances for at least three months before its initial public offering. The law was
intended to keep a company from hyping its stock, but in reality its main effect is
to keep small investors in the dark.
Big institutional investors such as Fidelity and Vanguard are never in the dark.
They’re treated to what’s known as a “road show” just days before an IPO. In this
private meeting with company executives, they are updated on the startup’s
Thus, the big investors know if a stock has recently become more risky and can
pass on it. Or they may decide to buy it anyway, knowing they can resell the stock
on the first day of trading before any bad news about the company is reported.
This practice, known as “flipping,” became common in an era when Internet stocks
were routinely tripling in value on their first day of trading.
Institutional investors weren’t the only ones flipping stock during the hot
market.Individual insiders did it too.During the Nasdaq bubble, investment
banks would routinely give hot new IPO stocks – FREE – to corporate
executives, venture capitalists and other decision-makers sitting on the boards
of companies whose business the banks wanted.
These privileged decision-makers would then flip their shares on the first day
of the IPO for quick profits.
While the investment banks were giving out free stock to their favored
clients, they were also giving out bad advice to their mom-and-pop customers.
In a study of high-tech stocks, Roni Michaely of Cornell University and Kent
Womack of Dartmouth College found that investment banks rarely downgrade a
company’s stock to a “sell” rating if they have a business relationship with the
Despite these shenanigans, the savvy retail investor could at least take comfort in
Rule 144, the SEC regulation that bars a company’s owners from selling their stock
for 180 days after an IPO. (This type of stock is sometimes referred to as
“locked stock.”) So if the stock did tank three months after it was issued, at
least the small investor could find solace in the fact that the entrepreneur and his
venture capital backers had taken a loss on their stock as well.
Or did they?
Actually, during the high-flying days of the tech bubble, few insiders were
required to take risks. The investment banks devised a new financial service:
They would promise to buy a venture capitalist’s or tech executive’s
locked stock as soon as the 180 days were up – but at the stock’s
higher early issue price.
This special service for favored customers didn’t cost the banks a thing, since they
would then use a combination of sophisticated financial instruments to “short” the
stock. That is, the banks would make money if the stock dropped in value, which it
almost always eventually did.
The technology stock bubble is already being compared to previous financial
manias” Dutch tulips in the 1600s, U.S. railroads in the late 1800s, etc. But what
sets this most recent mania apart is its Ponzi scheme quality.
Never before has so much wealth been transferred from one group of people to
another in such a short time.
Maybe if the Securities and Exchange Commission steps in to restore fairness, it
never will again.
(Michael C. Perkins is a founding editor of Red Herring magazine and co-author of
“The Internet Bubble.” He and Celia Nunez are authors of “A Cool Billion,” a novel
about Silicon Valley.)
$ $ $
The Man Who Loves to Sue
Veteran New York attorney Mel Weiss has filed scores of
lawsuits against investment banks,
seeking billions for what he calls ‘corrupt’ IPO practices.
By Edward Robinson – Bloomberg Markets Magazine
Mel Weiss says he knows the reason behind the boom and bust of the initial-public-offering market during the late 1990s——and it’s not irrational exuberance.
Weiss, a New York plaintiffs lawyer who specializes in stockholder lawsuits, says
the IPO rise and fall was the result of the largest case of market manipulation and
fraud ever to beset the investing public.
“This process was absolutely corrupt,” Weiss says, “and it’s vicious in its impact
because people were taking their life savings and putting it into this market as if it
was never going to end.”
Since February, Weiss, 66, has filed more than 180 class-action lawsuits against
Wall Street investment firms on behalf of hundreds of investors. Among the firms
named in the suits are Credit Suisse First Boston; Goldman, Sachs & Co.;
Merrill Lynch & Co.; Morgan Stanley Dean Witter & Co.; Robertson Stephens
Inc.; Lehman Brothers Holdings Inc.;and Salomon Smith Barney Inc., as well as
the Internet technology companies they took public.
Weiss vows to prove that the banks used kickback schemes, secret profit-sharing agreements with selected clients and price fixing to inflate the value
of IPOs. Individual investors who bought these companies’ stocks paid hidden
premiums and should, in effect, receive refunds, he says.
Many of the cases center on the activities of Frank Quattrone, head of CSFB’stechnology investment banking group in Palo Alto, California, and his staff.
Victoria Harmon, a spokeswoman at CSFB, denies Weiss’s charges. “We refute the
allegations in these suits and will defend ourselves vigorously,” she says. Harmon’s
counterparts at Goldman Sachs, Morgan Stanley and the other banks decline to
comment. . . .
As in most securities cases that Weiss has tried, his ultimate aim will likely be to
seek a cash settlement for his clients. In these cases, the banks may have to spend
$1 billon-$6 billion to settle the litigation, according to James Newman, executive
director of Securities Class Action Services, a research firm. Newman estimates
that losses attributable to the alleged fraud are $10 billion-$60 billion;
securities class actions are typically settled at about 10 percent of losses. . . .
Dozens of other plaintiffs’ firms have filed similar claims against investment banks
and Internet companies. In total, 860 class actions, the largest collection of
such cases in financial history, have piled up in U.S. District Court in lower
Manhattan in connection with almost 200 IPOs launched from 1998 through 2000.
. . .
“The last time we saw a feeding frenzy like this was the savings
and loan crisis,”says Daniel Dooley, head of PricewaterhouseCoopers’s
securities litigation consulting practice, referring to the failure of more than 880
S&Ls from 1988 to 1993.
In addition, the U.S. Securities and Exchange Commission and the National
Association of Securities Dealers (NASD) are each investigating Wall Street’s
IPO allocation practices, and the U.S. Attorney’s Office in New York has
impaneled a grand jury that is pursuing a criminal probe….
In Weiss, the investment banks face a foe who has stung them before. In 1998,
Weiss’s firm, which he co-founded in 1965, roiled Wall Street when more than 30
market makers——including Merrill Lynch, CSFB, Goldman Sachs and A. G.
Edwards & Sons——paid an unprecedented $1.02 billion to settle an antitrust suit
alleging that they had fixed the prices and spreads of stocks traded on the
Nasdaq Stock Market….
Now the stakes are even higher. Resolving these cases could eclipse the largest
securities-class-action settlement so far: $2.8 billion, paid out by Cendant Corp.
in an accounting fraud case in 1999.
Securities class actions are usually settled before they go to trial, because
companies fear backbreaking jury verdicts, says Joseph Monteleone, a senior vice
president at Kemper Insurance Cos., which writes policies for corporate officers
“I don’t think anyone foresees any of these cases ever making it to trial,” he
At the heart of the cases are two sets of allegations:
First, claims Weiss, underwriters demanded that someinvestors pay secret,
excessive brokerage commissions to get allocations of shares in the
IPOs of hot Internet companies.
Weiss says those payments, by which investors agreed to share up to 33 percent
of the profits made in an IPO, were nothing more than kickbacks. He argues that
company officers and underwriters violated the Securities Act of 1933 by failing
to disclose such commissions in prospectuses and registration statements.
Second, Weiss alleges that underwriters entered into “tie-in”
arrangements with investors——transactions in which investors secretly
agreed with underwriters to purchase shares at preset prices in the days after
the offering, known as the “aftermarket.” Also called “laddering,” this practice
can artificially boost share prices and is illegal.
For example, Red Hat Inc., a Durham, North Carolina-based software maker,
went public on Aug. 11, 1999, at $14 per share. Weiss says lead underwriter
Goldman Sachs used tie-ins to jack up the price following the offering, and within
30 days, the price had soared eightfold. Goldman; CSFB, a co-underwriter; and Red
Hat all decline to comment….
Locker, the lawyer representing companies named in the suits, says Weiss’s tie-in
allegations don’t make sense. “Why would underwriters, given the extreme demand
for IPO allocations and expectations that such stocks would skyrocket, need
commitments from investors in the aftermarket to boost the stock?” she asks.
Weiss replies that the motive was simple: “The greed factor on Wall
Street became acute.”…
Milberg Weiss’s scorecard includes settlements in some of the biggest financial
fiascoes of the past 15 years.
In 1988, Weiss, representing a class of bondholders, helped reach a $775 million
settlement in litigation regarding the financial meltdown of the Washington Public
Power Supply System, the largest municipal bond default ever.
In 1992, Milberg Weiss—representing stockholders and bondholders in American
Continental Corp., the parent of Charles Keating Jr.’sLincoln Savings &
Loan——helped recover $240 million in a racketeering suit connected to Drexel
Burnham Lambert andMichael Milken….
Weiss says he savors challenging powerful opponents. In February 1999, he stood
before more than a hundred German executives, ministers and other dignitaries in
Bonn as the lawyer for thousands of slave labor victims suing German industry
for human rights crimes during World War II.
Weiss cut right to the heart of the matter, asking the defendants if they were
prepared to get the aging victims some cash before they died. As part of a larger
settlement involving all victims of the Holocaust, he resolved the class actions with
the German government and several companies—including DaimlerChrysler AG,
Siemens AG and Degussa AG—in 2000 for $5.2 billion….
Weiss’s lawsuit against VA Linux, a Fremont, California-based company that makes
workstations supporting the Linux operating system, and CSFB, the lead
underwriter in its IPO, is likely to be the primary test case because it was filed
first, says Steven Schulman, a Milberg Weiss partner working on the litigation.
Under Frank Quattrone’s direction, CSFB became the No. 1 underwriter of IPOs
in the computer, software, Internet and semiconductor industries in 1999 and
2000, garnering 24 percent of the market, according to Bloomberg data. CSFB is
named in 66 of the class actions filed.
The suit charges that CSFB entered into secret arrangements with hedge funds to
allocate blocks of the 4 million shares VA Linux offered in its IPO on Dec. 9,
1999, in exchange for payments made in the form of excessive commissions.
VA Linuxwent public at$30 per share and skyrocketed to$239.25that day, the largest single-day gain in history for
On Nov. 9, 2001 it traded at$1.75.
The suit names two hedge funds—— GLG Partners LP, based in London, and
Chelsey Capital, based in New York——as having obtained “suspiciously large
Weiss says the CSFB commissions constituted a kickback scheme in which
investors agreed to share IPO profits with CSFB and other co-underwriters. The
profits were allegedly paid back to the bank in the form of extra brokerage
commissions dispensed on trading that got executed in unrelated stocks in the
weeks and months following the offering.
By adding 20 cents-$1 per share in commissions in trades of, say, General Electric
Co. or AT&T Corp. or any other stock, the investors, the suits charge, kicked back
profits from their earnings on the IPO of VA Linux, a process known as a “wash
Weiss is not accusing CSFB of violating securities laws with the transactions
themselves. He says VA Linux and CSFB broke the law by failing to disclose extra
commissions in the IPO prospectus and registration statement.
As a result, Weiss says, the prospectuses were “false and misleading”and
shareholders should be entitled to recover their investments.
Nicki Locker, VA Linux’s lawyer, says her client was not obligated to disclose the
payment of excessive commissions under the Securities Act of 1933….
$ $ $
August 22, 2001
Asian Times Online
Speaking of corruption …
There are as many opinions on what exactly caused the 1997-98 Asian crisis as
there are analysts of it. But four years after speculative attacks on and forced
devaluation of the Thai baht kicked loose the mudslide, the International
Monetary Fund, the World Bank, and most – Western, at any rate – analysts seem
to be agreed that lack of transparency in financial transactions, political loans and
lending to family members without due diligence or project evaluation, and other
questionable or corrupt practices grouped under the catch-all terms of “moral
hazard” and“crony capitalism”played a major role in making the East
Asian economies vulnerable to taking a great fall.
The drop in East Asian asset prices, of course, was dramatic. Just prior to the
onset of the crisis in July 1997, the combined stock market capitalization of the
exchanges of the principal crisis economies of Indonesia, Korea, Malaysia and
Thailand was around US$520 billion.
By January of 1998, it had dropped to about $280 billion, and – some intermediary
rallies notwithstanding – now stands at $260 billion, cut in half over the past four
These are ugly numbers.
Consequences of the East Asian asset price collapse, unhappily, have not been
limited to the rather small number of asset holders,but have affected
hundreds of millions of victims of collateral damage.
Ugly practices equally responsible for the financial and social disaster of the past
several years must be stamped out. . . .
For every greedy and unscrupulous East Asian borrower there were not only
greedy Asian, but as many equally greedy and “moral-hazard”-afflicted Western
and multilateral lenders. At the World Bank, there was a whole team that
“analyzed” and touted the “East Asian Miracle” only a couple of years before the
crisis hit, and it was “Asian values”, not “moral hazard” the fabled report
highlighted. The combination of venom and glee to which Asia and its economic
woes have been treated since 1997 represent a disgusting bit of hypocrisy.
In this context, we take note of a prescient Wall Street Journal article. In part it
“Last year banks boosted credit [at] … the fastest pace in 10 years. More financial
institutions eased their lending standards than raised them, and many lowered
rates for the dicier deals.
According to a prominent banker, ‘Credit standards are the weakest of any
time during [his] nearly four decades of banking.’
A leading businessman said, ‘There’s too much money chasing too few
deals … As long as the economy stays hot, the impact of slipping
credit quality will remain muted. But when the downturn hits – and
someday it will hit – the recession will be exacerbated by defaults
on loans that never should have been made.”
And, no, the article was not in shrewd anticipation of the Asian crisis. It was
published on April 20, 1998 and it was about the US economy. The banker quoted
was John Medlin, chairman of Wachovia Bank, and the businessman GE’s Jack
Welch. Two years later, US technology stocks collapsed. Six months after that the
US economy went into steep decline. Moral hazard? Corrupt practices? We’ll let
US regulators, bankers, analysts and financial journalists figure that out.
And US regulators, specifically the Securities and Exchange Commission, and New
York prosecutors at present have another little problem to cope with. It appears
that during the late 1990s Internet IPO booma cozy little relationship
between analysts, investment bankers and preferred investors
“You write a nice report on the prospects of a company about to go public and
you’ll be rewarded,” analysts were told. And paid they were. “We’ll make sure
you’ll get all the stock allotments you want, but you’ll kick back some of your
profits,” investors were told.
And kick back they did.
And who were the ones doing the telling? Not some fly-by-night brokerage
outfits, but Wall Street’s big boys: Credit Suisse First Boston in the
lead, followed by Goldman Sachs, Merrill Lynch, Morgan Stanley,
Lehman Brothers, Salomon Smith Barney.
CSFB’stech team boss Frank Quattrone raked in hundreds of millions,
personally; the bank billions.
Cronyism? C’mon now.
But our favorite – ah, so transparent – recent deal is a transcontinental,
A few months back,Deutsche Telekom, one of the world’s largest (and most
heavily indebted – in the order of magnitude of the foreign debt of Thailand)
telecommunications companies acquired US mobile phone service providerVoiceStream. As the result of the acquisition, Hong Kong’s Hutchison
Whampoa, a VoiceStream shareholder, found itself with tens of millions of
Deutsche Telekomshares it apparently didn’t want.
But there was a problem: a lock-up period terminating September 1, 2001, during
which no shares could be sold. So, on August 3, Hutchison officials met in Hong
Kong with Deutsche Bank officials and a deal was struck: Hutchison would “lend”
its Deutsche Telekom shares to Deutsche Bank for a year (some call options
included), and the bank would sell the shares in private transactions.
Quite coincidentally, also on August 3, a Deutsche Bank telecom analyst, Stuart
Birdt, issued a “Buy” recommendation for the Telekom stock. Then, on August 7,
the bank put 44 million Telekom shares on the market –and shortly
thereafter the Telekom share price in Frankfurt crashed, losing 30
percent in value within 48 hours and imparting losses of well over
US$10 billion to shareholders caught unawares.
Not so, says Deutsche Bank which stands to collect hefty commissions. Not so,
also appears to be the verdict of the German securities watchdog (whose teeth
seem to have been pulled and eyes blinded).
Yes, Dear Reader, we know: Two wrongs don’t make a right. Shady Asian
deals don’t become acceptable because of shady American and European ones.
We just thought we’d inform you on the marvelous progress of globalization.
In April 1986, a ripple of anticipation washed over the more than 2,000
participants crammed into the main ballroom of the Beverly Hilton as curtains drew
back for a screening of one of Drexel’s “commercials,” now a popular fixture of thePredators’ Ball. As the strains of the “Dallas” theme song filled the room, Larry
Hagman strode onto the screen, flashing a “Drexel Express titanium card.” The
card has “a ten-billion-dollar line of credit,” J.R. drawled. “Don’t go hunting
Then came a spoof of the popular Madonna video, “Material Girl.” A voice like
Madonna’s lip-synched “I’m a Double-B girl living in a material world,” a double
entendre referring to low-grade bond ratings and bra size. Madonna danced on the
video screen and the chorus sang, “Drexel, Drexel.” The crowd roared with
delight. When the spotlight fell on the conference’s surprise entertainer, it was
Drexel, proud of its own new star, wanted Martin Siegel front and center
throughout the affair, but Siegel demurred. He’d only been at the firm a month
and a half, and he didn’t want to upstage veteran Drexel officials. Siegel declined
the opportunity to host the M&A (Mergers & Acquisitions) department breakfast,
leaving that role to Dennis Levine, who boasted of Drexel’s growing strategic
prowess. But [Frederick] Joseph did persuade him to moderate a panel featuring
takeover lawyer Joseph Flom and other lawyers discussing legal developments in
the takeover field.
“You know me as a staunch defender of targets,” Siegel began, reaching under the
table and donning a white cowboy hat, symbolizing the blue-chip Kidder, Peabody.
“Just because I’ve come to Drexel doesn’t mean I’ve changed my views,” he said
with a twinkle in his eye as he reached under the table again and substituted a
black hat for the white one.
Everyone laughed, even Siegel’s establishment clients. Several of them, including
the chairmen of Lear Siegler and Pan American, gave presentations at the
conference. The corporate lambs were lying down with the lions.
And so were the politicians. Drexel had had no Washington office or registered
lobbyists before 1985. Then, however, Congress had begun rumbling about hostile
During the Unocal raid, Representative Timothy Wirth, the powerful Colorado
Democrat who chaired the Subcomittee on Telecommunications, Consumer
Protection and Finance, introduced a bill outlawing green-mail.
Drexel, opposed to the measure, hired a former White House aide and opened an
office in Washington. It retained Robert Strauss, former Democratic National
Committee chairman, and John Evans, a former SEC commissioner, as lobbyists.
Contributions from Drexel’s political action committee rose from $20,550 in the
1984 elections to $177,800 in the 1986 elections.
At the 1986 Drexel bond conference, the once-critical Wirth was a featured
speaker. Drexel executives gave $23,900 to his successful Senate campaign, and
Wirth became a defender of junk bonds. His earlier attempt to prohibit greenmail
went nowhere, and he didn’t reintroduce it.
Drexel invited other influential politicians to speak, including Senators Bill
Bradley, Alan Cranston (the recipient of $41,750 in Drexel money that year),
Edward Kennedy, Frank Lautenberg, and Howard Metzenbaum.Most of them
seemed as dazzled by the aura of megamoney as the lowliest
For good measure, Drexel executives contributed $56, 750 to Senator Alfonse
D’amato of New York, then chairman of the securities subcommittee. . . .
During the early and mid-1980s, Milken’s highly leveraged clients seemed to show
an amazing ability to stave off default, even when operating results were
disappointing. In those cases, Milken simply “restructured,” piling on a new and
dazzling array of high-yield securities to replace the debt that was on the verge of
default. The new tiers invariably pushed payments further into the future, giving
the company more time to revive, and forestalling any rise in default rates.
That Milken could sell such restructurings – many of which, to anyone who studied
the numbers, appeared obviously doomed – was not merely a tribute to the
pervasiveness of his myth. It was a measure of the pliability of his captive clients,
especially the savings and loans and insurance companies.
By mid-1986, Milken’s friend Tom Spiegel had loaded Columbia Savings and Loan
with $3 billion of Drexel-generated junk; his crony Fred Carr’sFirst Executive
had a whopping $7 billion. More astoundingly, Milken himself would sit down at the
end of the day and move chunks of securities in and out of their portfolios. No one
minded as long as profits kept mounting.
Milken had other captive buyers.David Solomon ran his own money management
firm, Solomon Asset Management, with over $2 billion in assets,most of it
from employee welfare and pension plans.
He had become one of Milken’s earliest converts, and invested heavily in Milken’s
high-yield products. Milken rewarded Solomon by making him a manager of a junk-bonk mutual fund, the Finsbury Fund.
Finsbury’s purchases of Milken products generated enormous commissions for
Milken’s high-yield department, some of which were owed to the Drexel salesmen
who induced clients to buy into Finsbury. But Milken wanted all the commissions he
had to pay other Drexel salesmen. When Solomon refused, Milken threatened to
have Solomon removed from his lucrative position as Finsbury’s manager. Solomon
Milken and Solomon, to recoup the commissions, simply inflated the price paid by
Finsbury for junk bonds, and Milken pocketed the difference. Sometimes Milken
helped generate phony tax losses for Solomon’s personal trading account. Solomon
evaded paying taxes on about $800,000 of income in 1985 alone. And Milken
bestowed some equity from the Storer buyout on Solomon. Much of this scheme
was illegal; ultimately, it was Finsbury shareholders and U.S.
taxpayers who were being cheated. . . .
~ ~ ~
Thus, in ways large and small, legal and illegal, the ordinary discipline of a free
market of arm’s-length buyers and sellers was undermined. The high-yield
market’s growth was limited only by Milken’s ability to generate product – not by
market discipline or independent decision-making on the part of buyers. In 1976,
before Milken moved to Beverly Hills, junk-bonk issues had totaled $15 billion.
Now, in 1986, it was $125 billion. . .
As for Milken’s own personal wealth, public and private estimates at the time
tended to hover around the $1 billion mark . . . Yet this was very far from the
truth. Milken made $550 million from Drexel in 1986. In addition, he (and the
funds he controlled in the names of family members) probably earned at least that
much from the Beatrice warrants alone. Milken and other partners received a
distribution of $437.4 million from Otter Creek, the Milken-created partnership
that had traded so presciently in National Can stock.
Beatrice was only one of dozens of transactions in which Milken and his family
gained valuable warrants and other equity interests, and Otter Creek was only one
of more than 500 Milken-created partnerships. While such assets shift in value
and are difficult to measure in any event, a closer and still conservative estimate
of Milken’s and his family’s net worth by the end of 1986 would be $3 billion.
In all likelihood, Milken had made himself one of the ten richest men in America.
No wonder Milken seemed so in command at the 1986 junk-bond conference. . . .
Drexel was now truly a rival to Goldman, Sachs and Morgan Stanley. At this rate,
those firms would inevitably be eclipsed. . . .
That year’s guest list was practically a who’s-who of self-made multimillionaires of
the 80s: Merv Adelson, Norman Alexander, Henry Kravis, George Roberts, Boone
Pickens, John Kluge, Fred Carr, Marvin Davis, Barry Diller, William Farley, Harold
Geneen, Rupert Murdoch, Steve Ross, Ron Perelman, Peter Grace, Sam Heyman,
Carl Icahn, Ralph Ingersoll, Irwin Jacobs, William McGowan, David Mahoney,
Martin Davis, John Malone, Peter Ueberroth, David Murdock, Jay and Robert
Pritzker, Samuel and Mark Belzberg, Carl Lindner, Nelson Peltz, Saul Steinberg,
Craig McCaw, Frank Lorenzo, Peter May, Steve Wynn, James Wolfensohn, Oscar
Wyatt, Gerald Tsai, Roger Stone, Harold Simmons, Sir James Goldsmith, Mel
Simon, Henry Gluck, Ray Irani, Peter Magowan, Alan Bond, Ted Turner, Robert
Maxwell, Kirk Kerkorian. Mingling with them were key Drexel corporate finance
and bond salesmen, such as Siegel, Ackerman, and Dahl. . . .
Boesky arrived, accompanied by two bodyguards. Siegel hadn’t seen Boesky since
March 1985, more than a year ago. He noticed Boesky was carrying his small purse,
and then he noticed how tired and drawn Boesky seemed.
There were no women at Bungalow 8 this year. Siegel had told Joseph that he
wouldn’t participate in anything that involved procuring women, whether they were
out-and-out prostitutes or not. Joseph himself had tried to ban the women after
the 1984 conference, but Milken and Engel had opposed him. Milken, despite his
own professed family values, insisted that “men like this sort of thing.” This year
Joseph had put his foot down. He assured Siegel and Schneiderman that he had
ordered Engel not to invite any women to the bungalow, and Engel had reluctantly
complied. But he made sure there would be beautiful women at the dinner
afterward at Chasen’s, even if wives also attended. . . .
Joseph looked over the crowd, and felt, for the first time, an almost palpable
sense of the power that Drexel had unleashed. He turned to Schneiderman. “We
can’t let this go hog-wild,” he said, struggling to be heard over the din of the party.
“No one is going to let every company in America get taken over.”
~ ~ ~
Boesky, his trademark black three-piece suit and watch chain concealed under
cap and gown, looked out of sorts as he waited impatiently in the wings of
Berkeley’s Greek theater, the outdoor amphitheater that serves as an open-air
setting for the University of California’s commencement ceremonies.
Rows of students filed into their seats, eagerly anticipating Boesky’s address. The
students of the university’s business school, Milken’s own alma mater, had chosen
Boesky, by popular vote, to be their 1986 commencement speaker. The famous
arbitrageur, lacking even a college degree, had flown to California that day, May
18, 1986, in a private jet. He was typically late, arriving halfway through the
traditional dean’s banquet that precedes the ceremony. . .
After welcoming remarks by the dean, Boesky stepped to the podium, greeted by
enthusiastic applause. He quickly demonstrated that he could be an excruciatingly
dull speaker. He dwelled on platitudes about America as a land of opportunity and
told of his own rise, a highly edited story of how the Detroit-raised son of
immigrant parents had conquered Wall Street. Then, when it seemed as though he
would lose his audience permanently, he galvanized the crowd with just a few
“Greed is all right, by the way,” he said, raising his eyes from his text and
continuing with what seemed like genuinely extemporaneous remarks.
“I want you to know that I think greed is healthy. You can be
greedy and still feel good about yourself.”
The crowd burst into spontaneous applause as students laughed and looked at each
other knowingly. . . .
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