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When it comes to research analysts' conflicts of interest, lawyer Jacob Zamanksy, principal of Zamansky & Associates, is one of Wall Street's toughest watchdogs.
He played a crucial role in convincing Merrill Lynch to shell out $400,000 in the summer of 2001 to settle a lawsuit alleging that rosy research from star Internet analyst Henry Blodget misled his client. The case involved Queens (N.Y.) pediatrician Debases Kanjilal, who claimed he lost $500,000 on Infospace due to Blodget's recommendations, and led to New York Attorney General Eliot Spitzer's investigation into conflicts of interest on Wall Street.
On Apr. 12, Zamansky filed an arbitration claim against Salomon Smith Barney's telecom analyst Jack Grubman, who resigned Aug. 15. The claim, which is scheduled to go to arbitration in April, 2003, involves another client, an individual investor who allegedly lost his life savings by following Grubman's stock recommendations.
Zamansky's case is on behalf of George Zicarelli, a 60-year-old video editor for CBS News, against Grubman and Salomon Smith Barney, alleging that his client lost $455,000 in Global Crossing stock due to Grubman's recommendations.
Zamansky recently shared his thoughts on Grubman's resignation -- and who might be next to resign on Wall Street amid the ongoing fallout from the bursting of the telecom and Internet bubbles -- with BusinessWeek Investment Banking Editor Emily Thornton. Here are edited excerpts of the conversation:
Q: Will Grubman's resignation help or hurt pending lawsuits against him and Salomon Smith Barney?
A: This is going to help investors. [To me,] it's a clear indication that Salomon Smith Barney has had enough of this guy and considers him a liability. This is also going to be pursued at every investigative level.
Grubman is being investigated by regulators for allegedly directing hot initial public offering (IPO) shares to executives of the telecom companies he was covering to win investment banking business. [Grubman has denied the allegations.] His resignation basically splits him up from the firm. I don't know if they cut a deal with Grubman. But you're going to have the ability for investors to get [legal] discovery for both Grubman and Smith Barney about what he did and why he gave [allegedly] misleading research reports.
Q: Who might be next?
A: Somebody who seems to be off the radar screen but who could be next at center stage is Mary Meeker [the star Internet analyst] at Morgan Stanley. I think she's going to be the subject of ongoing investigations.
Q: There's an impression that it would be tougher to investigate Meeker because there may not be "smoking gun" e-mails found -- as there were in the Blodget case -- saying she didn't believe in the stocks she was recommending. What do you think?
A: Each investigation is a little different. In Merrill's case, you saw [the conflicts with] the e-mails....If she was promoting investment-banking business and at the same time giving glowing research reports, that's a conflict of interest that's no different [than Blodget's]. With her, when we get the self-evaluation memos that I think the attorney general has asked for, we'll see whether she was doing much investment-banking work. That could be the smoking gun.
Q: What about Credit Suisse First Boston? The word on the Street seems to be that it will be less a focus for regulators since it doesn't have a large retail-brokerage business, unlike Merrill Lynch and Salomon Smith Barney.
A: I think you're right. Other firms did use CSFB research to promote their offerings, however. The compromising research issue is still in play.
Q: So you believe the issue of conflicted research analysts is still far from over?
A: It's far from over. I think Meeker needs to go also. She's probably next on the regulators' hit list. Once we get rid of any star analysts [who appear to have been conflicted], it sends a signal to all analysts that they need to give honest, objective advice, rather than promote investment banking business. Until all the bad apples are kicked out, we're not going to have closure or a real signal.
Edited by Beth Belton
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Copyright 2002, Bloomberg L.P.
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