In his seven years as director of Utah's Securities Div., S. Anthony Taggart has gone after Ponzi schemes and penny-stock hucksters. But he has never given much thought to Wall Street. That's about to change. In the wake of New York Attorney General Eliot Spitzer's May 21 settlement with Merrill Lynch & Co. (MER), Taggart is part of a 40-state probe into how the conflicts of interest between brokerage firms' research and investment banking divisions affect investment advice. He has been tapped to lead the investigation of Goldman, Sachs & Co. (GS), one of the most sophisticated securities firms around.
How did someone who readily admits he knows little about Wall Street end up with this assignment? "It was more coincidence than anything else," he admits. "The bigger states wanted the firms better known to small investors."
That haphazard approach has Wall Street worried as the states launch their most extensive securities probe ever. Officials scattered around the country, with vastly different goals, motives, and investigative capabilities, will scrutinize 12 of the largest brokerage firms and pore through millions of their internal documents. The states' goal: to determine if analysts at firms besides Merrill are recommending stocks to attract investment banking deals.
The problem? Wall Street execs fear that a cacophony of accusations coming from statehouses could continue to sully their already tarnished image. They also fret that the disparate probes could lead to a hodgepodge of state regulations. "There are broader policy questions here," says a lawyer for one Wall Street house. "These are national markets, and there ought to be a national approach."
Yet that worry may be overstated. One securities official close to the investigations says that the states are more interested in wringing out fines than forcing structural changes or setting new rules for the industry. When the states formed a task force to tackle the analyst issue, one of its first tasks was coming up with a formula for divvying up the funds from Merrill and future settlements.
The Securities & Exchange Commission has its gripes as well. In theory, the states could be of assistance in such a vast probe. But Chairman Harvey L. Pitt appears less than thrilled to share his turf. Pitt says he's willing to work with the states, but sources say the SEC chief doesn't want the states to dictate the outcome. The SEC has already adopted new rules that attempt to reduce conflicts by, for example, not allowing analysts to be paid directly for their work on investment banking deals. Pitt's message, says a former SEC enforcement official, is "bug off." But given the widespread public perception that the SEC has not been tough enough on Wall Street and is lagging Spitzer in investigatory zeal, the states are unlikely to take his advice unless Washington takes a more aggressive stance.
The states insist they can avoid a regulatory Babel. "There's this concern that we are going to have 25 or 30 different sets of rules," says Indiana Securities Commissioner Bradley W. Skolnik. "That's clearly not our intention." He says the Merrill settlement can serve as a template for other firms.
Indeed, that's already happening, as Wall Street firms have been quick to make a public show of cooperation, if only to head off stiffer measures. Some firms are voluntarily adopting changes along the lines of the Merrill settlement--and even grudgingly praising Spitzer. Credit Suisse First Boston CEO John J. Mack called Spitzer's work "a positive step forward for our industry" in a May 24 memo to employees. Salomon Smith Barney simply announced it was adopting the Merrill settlement. Goldman named former New York Federal Reserve Bank President E. Gerald Corrigan as a research ombudsman. His job: making sure that analyst recommendations are conflict-free. And a Goldman spokesman says the firm welcomes the Utah probe.
For now, the states have the high ground. After all, it was Spitzer, not the SEC, who unearthed evidence that Merrill analysts were privately deriding the shares of companies they were publicly recommending. Like it or not, Wall Streeters may be spending a lot of time with folks from places like Salt Lake City, Sacramento, and Des Moines. By Dan Carney, with Mike McNamee, in Washington and Emily Thornton in New York