Securities and Exchange Commission

Litigation Release No. 18110 / April 28, 2003

Securities and Exchange Commission v. Credit Suisse First Boston LLC, f/k/a Credit Suisse First Boston Corporation, 03 CV 2946 (WHP) (S.D.N.Y.)

SEC SUES CREDIT SUISSE FIRST BOSTON FOR RESEARCH ANALYST CONFLICTS OF INTEREST FIRM TO SETTLE WITH SEC, NASD, NYSE, NY ATTORNEY GENERAL, AND STATE REGULATORS

The Securities and Exchange Commission announced today that it has settled charges against Credit Suisse First Boston LLC ("CSFB"), formerly known as Credit Suisse First Boston Corporation, a New York-based brokerage firm and investment bank, arising from an investigation of research analyst conflicts of interest. This settlement, and settlements with nine other brokerage firms, are part of the global settlement the firms have reached with the Commission, NASD, Inc., the New York Stock Exchange, Inc. ("NYSE"), the New York Attorney General, and other state regulators. As part of the settlement, CSFB has agreed to pay $75 million as disgorgement and an additional $75 million in penalties. One-half of the total of these payments - $75 million - will be paid in connection with the SEC action and related proceedings by the NASD and NYSE and will be placed into a distribution fund for the benefit of customers of the firm. The remainder will be paid to resolve related proceedings by state regulators. In the SEC action, CSFB has agreed to a federal court order that will enjoin the firm from future violations of the federal securities laws and NASD and NYSE rules and require the firm to make changes in the operations of its equity research and investment banking departments. In addition, CSFB will pay, over five years, $50 million to provide the firm's clients with independent research.

In connection with this matter, the Commission today filed a Complaint against CSFB in the U.S. District Court for the Southern District of New York, alleging violations of the federal securities laws and NASD and NYSE rules. According to the Commission's Complaint, from at least July 1998 through December 2001, research analysts at CSFB were subject to inappropriate influence by investment banking at the firm. The Complaint also alleges that CSFB published false or misleading research, published exaggerated or unwarranted research or research that lacked a reasonable basis, engaged in improper "spinning" activities relating to initial public offerings ("IPOs"), and failed to maintain appropriate supervision over its research and investment banking operations.

Specifically, the Commission's Complaint alleges that:

• In the Technology Group at CSFB, research analysts' supervision and compensation were closely aligned with investment banking. In particular, the Technology Group used research analysts to help solicit and conduct investment banking business. CSFB's efforts to attract potential and continued investment banking business created pressure on equity research analysts to initiate and maintain favorable coverage on investment banking clients. This pressure at times undermined equity research analysts' objectivity and independence. In certain instances, CSFB's marketing, or "pitch," materials implicitly promised that a company would receive favorable research if it agreed to use CSFB for its investment banking business. The independence of some of CSFB's equity research analysts was also impaired because they were evaluated, in part, by investment banking professionals and their compensation was influenced by their contribution to investment banking revenues.

• CSFB issued fraudulent research reports on two companies: Digital Impact, Inc. and Synopsys, Inc. In both cases, research analysts expressed positive views of the companies' stocks that were contrary to their true, privately held beliefs. In these instances, investment bankers pressured research analysts to initiate or maintain positive research coverage to obtain or retain investment banking business, and the analysts were pressured or compelled to compromise their own professional opinions regarding the companies at the direction of the firm's investment bankers.

  • As to Digital Impact, CSFB underwrote the company's IPO in November 1999, earning more than $5 million from the offering. It initiated coverage shortly thereafter with a "buy" rating, and maintained a "buy" or "strong buy" rating from January 2000 to April 2001, even while the stock price declined from $50 to less than $2. In May 2001, a new analyst took over and, between then and September 2001, stated on two occasions that he wanted to drop coverage on the company because of its difficult market environment. However, he acceded to pressure from investment bankers not to drop coverage, and left the buy rating unchanged until he downgraded to "hold" on October 2, 2001.

  • As to Synopsys, the research analyst complained in an e-mail about: "Unwritten Rules for Tech Research: Based on the following set of specific situations that have arisen in the past, I have `learned' to adapt to a set of rules that have been imposed by Tech Group banking so as to keep our corporate clients appeased." After the analyst downgraded a company, an investment banker informed him of "unwritten rule number one: that `if you can't say something positive, don't say anything at all.'" The analyst further wrote that after issuing cautionary comments about another company, following which that company's CEO informed CSFB that he would never do investment banking business with CSFB, an investment banker informed the analyst of "unwritten rule number two: `why couldn't you just go with the flow of the other analysts, rather than try to be a contrarian?'" The analyst applied these "unwritten rules" to Synopsys, a company that he had rated as a strong buy from July 1999 - June 2000, but wanted to downgrade to a buy in light of a "down-tick in guidance." "By following rules 1 & 2," the analyst wrote, he "had successfully managed not to annoy the company, or banking."

• As to four other companies - Numerical Technologies, Inc., Agilent Technologies, Inc., NewPower Holdings, Inc., and Winstar Communications, Inc. - the pressure on analysts resulted in the issuance of research reports that lacked a reasonable basis, failed to provide a balanced presentation of the relevant facts, made exaggerated or unwarranted claims, or failed to disclose material facts.

• CSFB engaged in improper "spinning" activities relating to hot IPOs. From 1999 until April 2001, CSFB, through its Technology Private Client Services Group, a department within the Technology Group, allocated shares in CSFB's lead-managed technology IPOs to executive officers of its investment banking clients who were in a position to provide investment banking business to CSFB. This group made these allocations with the belief and expectation that the executives would steer investment banking business for their companies to CSFB. CSFB opened discretionary trading accounts on behalf of these executives. By having CSFB brokers control trading in these accounts, some executives owning accounts were able to realize profits in excess of $1 million in little more than a year, while others were able realize percentage gains in their accounts of 240% to over 950%.

• CSFB also failed to establish and maintain adequate procedures to protect research analysts from conflicts of interest and failed to supervise adequately research analysts' participation in investment banking activities. CSFB also failed to supervise adequately its employees with regard to IPO spinning and distribution practices.

CSFB has agreed to settle the Commission's action and has consented, without admitting or denying the allegations of the Complaint, to the entry of a final judgment that, if approved by the court, permanently enjoins CSFB from violations of antifraud provision Section 15(c) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 15c1-2 thereunder, Section 17(a) of the Exchange Act and Rule 17a-3 thereunder, and NASD and NYSE rules pertaining to just and equitable principles of trade (NASD Rule 2110; NYSE Rules 401 and 476), advertising (NASD Rule 2210; NYSE Rule 472), broker-dealer record keeping (NASD Rule 3110; NYSE Rule 440), and supervisory procedures (NASD Rule 3010; NYSE Rule 342). The final judgment also orders the firm to make the payments described above, and provides for the appointment of a fund administrator who, subject to court approval, will formulate and administer a plan of distribution for those monies placed into the distribution fund.

In addition, the final judgment orders CSFB to implement structural reforms and provide enhanced disclosure to investors, including a broad range of changes relating to the operations of its equity research and investment banking operations. CSFB has agreed to sever the links between research and investment banking, such that: research and investment banking are physically separated with completely separate reporting lines; analysts' compensation cannot be based directly or indirectly upon investment banking revenues; investment bankers may no longer evaluate analysts; investment bankers will have no role in determining what companies are covered by the analysts; and research analysts will be prohibited from participating in efforts to solicit investment banking business, including pitches and roadshows. In addition, CSFB must disclose on the first page of each research report whether the firm does or seeks to do investment banking business with that issuer, and when CSFB decides to terminate coverage of an issuer, CSFB must issue a final research report discussing the reasons for the termination. Each quarter, CSFB also will publish on its website a chart showing its analysts' performance, including each analyst's name, ratings, price targets, and earnings per share forecasts for each covered company, as well as an explanation of the firm's rating system.

CSFB also has agreed as part of this settlement to retain, at its own expense, an Independent Monitor to conduct a review to provide reasonable assurance that the firm is complying with the structural reforms. This review will be conducted eighteen months after the date of the entry of the Final Judgment and the Independent Monitor will submit a written report of his or her findings to the SEC, NASD, and NYSE within six months after the review begins. Five years after the entry of the final judgment, CSFB must certify to the SEC and other regulators that it has complied in all material respects with the requirements and prohibitions of the structural reforms.

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The Commission acknowledges the assistance of NASD, NYSE, the Massachusetts Securities Division, and other state regulators in the investigation of this matter.

SEC Complaint in this matter
SEC Final Judgment in this matter
Final Judgment Appendix A
Final Judgment Appendix B
Consent