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State sues firms { June 23 2003 } Original Source Link: (May no longer be active)
http://www.dailymail.com/news/News/2003062340/http://www.dailymail.com/news/News/2003062340/
State sues
Wall Street firms
Attorney general says
companies gave bad advice
Toby Coleman
Daily Mail staff
Monday June 23, 2003; 12:55 PM
The state Attorney General filed a lawsuit today saying that 11 major Wall Street firms abused West Virginia investors over the last four years.
The lawsuit, filed in Marshall Circuit Court, says the firms issued overly optimistic, and sometimes misleading, stock research to nab valuable investment banking business.
Attorney General Darrell McGraw said it's time for the securities firms to pay for doling out bad research to West Virginians and their investment advisers.
"This is a law enforcement action for misconduct," he said. "Misconduct that has happened thousands, tens of thousands, hundreds of thousands, even millions of times."
The suit names Bear Stearns, Credit Suisse First Boston, Goldman Sachs, Lehman Brothers, Citigroup Global Markets, J.P. Morgan, Morgan Stanley, Merrill Lynch, UBS Warburg and U.S. Bancorp Piper Jaffray as defendants.
Spokesmen for Merrill Lynch and Citigroup declined to comment.
With the suit, West Virginia has become one of the first states in the nation to use its consumer protection act to go after the Wall Street firms for crafting their stock research to win corporate business.
Under that law, any unfair, deceptive or dishonest act that affects a state resident is punishable by a $5,000 fine. The Attorney General's office says that nearly every West Virginian invested in the stock market or a mutual fund could have been affected by these firms' misleading stock research. That could lead to fines of $300 million or more, according to Deputy Attorney General Fran Hughes.
Even if the state wins the case, there's no guarantee that the investors allegedly bilked by the investment houses would see any of the money, McGraw said.
"The thrust of the lawsuit" is to force the firms to pay fines to the state, he said. But, "it is possible that there would be some recompense to individual investors."
Ten of the firms named in the suit have already agreed to pay a record $1.4 billion to settle similar charges brought by national regulatory agencies and a dozen state securities authorities, including West Virginia's.
As part of the settlement, the firms also agreed to change the way they handle stock research and to add what amounts to "buyer beware" notices to their future research.
State officials involved with that settlement, including Auditor Glen Gainer, said that suit was aimed at changing the way Wall Street operates.
"The Attorney General's action is more punitive in nature," Gainer said today during a press conference with McGraw.
McGraw said he filed the suit because stock analysts "crossed the line."
"They used the investment bankers' advice on what they needed to do to sell stock to influence the reports that they gave to the general public," he said.
McGraw's suit cites dozens of examples of stock researchers formulating their reports to win valuable investment banking business. Many of the examples were uncovered by investigators working on other lawsuits against Wall Street firms.
The state suit quotes a variety of e-mail exchanges that occurred in the Wall Street firms. In one, an analyst for Lehman Brothers writes that the ratings and price targets his firm issues "are fairly meaningless, anyway."
"Yes, the ‘little guy' who isn't smart about the nuances may get misled, such is the nature of my business," the e-mail reads, according to the suit.
The suit also accuses two firms of engaging in "spinning," a controversial practice that hit its height during the dot-com boom. The suit says the companies would hand out insider access to valuable Initial Public Offerings to clients and executives of businesses they were trying to woo.
Writer Toby Coleman can be reached at 348-4886.
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