UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission ("Commission" or "SEC") alleges:
NATURE OF THE ACTION
1. The Commission brings this action against defendant Credit Suisse First Boston LLC, f/k/a Credit Suisse First Boston Corporation ("CSFB") to redress its violation of provisions of the Securities Exchange Act of 1934 ("Exchange Act") and pertinent rules thereunder, and rules of NASD Inc. ("NASD") (formerly known as the National Association of Securities Dealers) and the New York Stock Exchange, Inc. ("NYSE").
2. From July 1998 through December 2001 (the "relevant period"), CSFB used its equity research analysts to help solicit and conduct investment banking business. By providing incentives for equity research analysts to assist in the generation of investment banking revenues, CSFB created and fostered an environment with conflicts of interest that, in some circumstances, undermined the independence of research analysts and affected the objectivity of the reports they issued.
3. The conflicts of interest and pressure on equity research analysts to contribute to investment banking revenue were particularly present in CSFB's Technology Group (headed by Frank Quattrone), where research analysts' supervision and compensation were closely aligned with investment banking. CSFB's investment banking revenue, driven mostly by technology stocks, steadily and significantly increased, from $1.79 billion in 1998, to $2.32 billion in 1999, and to $3.68 billion in 2000. The sphere of influence and authority that Quattrone exercised at CSFB remained significant throughout the technology boom.
4. 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 analyst objectivity and independence. In certain instances, (a) 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; (b) companies pressured analysts to continue coverage or maintain a certain rating or else risk losing the company as an investment banking client; and (c) these factors compromised the independence of equity research analysts and impaired the objectivity of research reports.
5. The independence of some of CSFB's equity research analysts was also impaired by the facts that they were evaluated, in part, by investment banking professionals and that their compensation was influenced by their contribution to investment banking revenues. Indeed, the vast majority of their overall compensation, in the form of bonuses, was based on the investment banking revenues generated by the firm. In many instances, bonuses for non-technology equity research analysts were directly linked to revenue generated by the firm on specific investment banking transactions. The fact that an equity research analyst's bonus was in part related to revenue from investment banking business created pressure on analysts to help generate more investment banking revenue.
6. The undue and improper influence imposed by CSFB's investment bankers on the firm's technology research analysts caused CSFB to issue fraudulent research reports on two companies: Digital Impact, Inc. ("Digital Impact") and Synopsys, Inc. ("Synopsys"). The reports were fraudulent in that they expressed positive views of the companies' stocks that were contrary to the analysts' 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. In addition, as to Numerical Technologies, Inc. ("Numerical Technologies"), Agilent Technologies, Inc. ("Agilent"), and Winstar Communications, Inc. ("Winstar"), 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. As to NewPower Holdings, Inc. ("NPW"), CSFB issued research reports that, at times, failed to disclose that CSFB and the research analysts covering NPW had proprietary interests in NPW.
7. CSFB also engaged in improper "spinning" activities relating to initial public offerings ("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 engaged in such spinning 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. Since most of the IPOs offered by CSFB were "hot" (i.e., they began trading in the aftermarket at a premium), and since portions of the allocations were typically "flipped" out (i.e., sold almost immediately) once the aftermarket opened, the spinning produced large, instantaneous profits for those executives who participated in these arrangements. By having CSFB brokers control trading in these accounts, the executives who owned some of these accounts were able to realize profits in excess of $1 million through this IPO activity.
8. As a consequence of the activity described above and herein, CSFB violated certain provisions of the Exchange Act and NASD and NYSE rules. Specifically:
JURISDICTION AND VENUE
9. This Court has jurisdiction over this matter pursuant to Sections 21(d)(1), 21(e), 21(f), and 27 of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §§ 78u(d)(1), 78u(e), 78u(f), and 78aa].
10. CSFB, directly or indirectly, used the means and instrumentalities of interstate commerce, of the mails, or of the facilities of a national securities exchange, in connection with the acts, practices, and courses of business alleged herein.
11. Venue is appropriate in this District pursuant to Section 27 of the Exchange Act because CSFB is found, has its headquarters and principal executive offices, and transacts business in this District.
12. Credit Suisse First Boston LLC, f/k/a Credit Suisse First Boston Corporation is a Delaware corporation with its headquarters and principal place of business in New York City. CSFB is and during the relevant period was a member of NASD and NYSE. CSFB is a global investment banking firm whose businesses include securities underwriting, sales and trading, investment banking, private equity, financial advisory services, investment research, correspondent brokerage services, and asset management. CSFB is a subsidiary of Credit Suisse Group, which is headquartered in Switzerland. On November 3, 2000, Credit Suisse Group acquired Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), another NASD member firm. As of December 31, 2002, CSFB had approximately 23,400 employees worldwide.
I. CSFB'S STRUCTURE AND PROCEDURES CREATED CONFLICTS
A. The Supervisory Structure of CSFB's Technology Group
13. Until June 1998, all of CSFB's equity research was issued through research analysts who worked in the Equity Research Department and who reported to the Director of Equity Research. Until that time, no equity research analysts were supervised by or had any reporting obligations to anyone in any investment banking department.
14. In June 1998, CSFB recruited Frank Quattrone, who was then in a senior position at Deutsche Bank Securities (also known as Deutsche Morgan Grenfell Inc. or "DMG") to head a distinct unit - the Technology Group - at CSFB that would provide an array of services to technology companies. Quattrone became the Managing Director of the CSFB Technology Group's Investment Banking Division, and negotiated a contract with CSFB to maintain the Technology Group as a semi-autonomous, "firm-within-a-firm" unit within CSFB through December 2001.
15. Quattrone established separate departments within the Technology Group for corporate finance (investment banking), mergers and acquisitions, and equity research, as well as a department devoted to private client services ("PCS"). Each of these departments reported to him. One of the purposes of the PCS department was to provide personal brokerage services to officers of investment banking clients of the Technology Group. The directors of the Technology Group Research Department and PCS Department had dual reporting obligations to Quattrone and to department directors in the firm's Equities Division but, as a practical matter, the principal reporting line was to Quattrone until a change in procedures was instituted in June 2001.
16. CSFB hired individuals who had worked closely with Quattrone at DMG to fill many senior level positions, including each of the department directors, within the Technology Group. Many of the people whom CSFB hired to work in the Technology Group had worked together previously at DMG. In fact, many of the equity research analysts and investment bankers whom CSFB employed from July 1998 through 2001 were recruited or merged into CSFB from other firms. The first infusion of those professionals came in July and August 1998, when the directors and others from DMG formed the Technology Group at CSFB. Given the wholesale move of the personnel, including senior management in research and investment banking, the reporting structure, work ethic, and future expectations of their roles likewise carried over to their new positions at CSFB.
17. As a result of the structure set forth above, Quattrone exercised his authority to apply an overall Technology Group strategy in his supervision of the Group's research analysts. He used that authority for "resource allocation" to influence the determination of those sectors, and in some cases the particular companies on which Technology Group research would initiate or maintain coverage. As a consequence of Quattrone's influence, Technology Group investment bankers were, at times, able to influence the sectors, and in some cases the particular companies, for which CSFB technology research analysts initiated or maintained coverage. At times, this determination was based on the level of CSFB's actual or anticipated investment banking business with a particular company.
B. Investment Banking Revenue Was a Major
18. From 1998 to 2000, CSFB's income from investment banking rose dramatically, fueled primarily by the technology sector offerings completed under Quattrone's leadership. In 1998, driven in large part from the revenue generated by the newly formed Technology Group, CSFB's investment banking revenue increased from approximately $1.47 billion to approximately $1.79 billion, or 21 percent. In 1999, the importance of investment banking as a major source of revenue continued to grow, as did investment banking's revenue and number of employees. That year, revenue from investment banking grew to approximately $2.318 billion, a 22 percent increase over 1998. Also in 1999, largely through the efforts of the Technology Group, CSFB managed more domestic IPOs than any other investment banking firm. By 2000, CSFB's investment banking revenue had mushroomed to approximately $3.681 billion, a full 59 percent increase over the previous year. Investment banking revenue in 2000 represented the largest percent increase in revenue for CSFB, constituting its second largest revenue source behind equity trading and sales and accounting for 30 percent of the firm's total revenues.
C. CSFB's Equity Research Analysts' Bonuses Were Determined,
1. Non-Technology Research
19. From July 1998 until May 2001, equity research analysts in non-technology sectors at CSFB received bonuses that were directly and indirectly based on the amount of investment banking revenue they helped generate. This created a conflict of interest for research analysts who had an incentive to help win investment banking deals for CSFB while they were also expected to issue objective research regarding those companies.
20. Specifically, equity research analysts were paid up to 3 percent of the net revenue generated by an investment banking deal, with a maximum bonus of $250,000 per deal. Some equity research analysts were also guaranteed a minimum bonus of either $15,000 or $20,000 for the investment banking deals on which they worked, depending on whether CSFB was lead or co-manager of the deal. This compensation was not part of the annual bonus, but was pursuant to employment contracts, and was paid on a quarterly basis. This program was initiated to provide an incentive for research analysts to assist in winning investment banking business. According to the Director of Equity Research:
21. The actual amount paid to a research analyst was based on the level of contribution that the research analyst made in connection with investment banking deals, as decided with input from the investment bankers. The conflict was evident in the reviews performed by investment bankers as well as self-reviews prepared by research analysts.
22. In evaluating the performance of equity research analysts to determine their compensation, investment bankers used a form that judged the analyst by origination of the deal, execution of the deal, and follow-through. Each section allowed for handwritten comments and called for the investment banker to rank the research analyst from one to three.
23. In one such evaluation, an investment banker wrote that the research analyst's "input and track record was critical to winning this business.... [The analyst] performed at her normal high level making a lot of investor calls.... [The analyst's] initiation of research coverage was timely and insightful. She has been a supporter of the stock despite difficult Internet environment."
2. Technology Group Research
24. From July 1998 until December 2001, equity research analysts employed in the Technology Group were compensated, in part, based on their contribution to investment banking deals. The vast majority of equity research analysts' compensation was derived from the bonus received rather than the base salary. At CSFB, it was not uncommon for a more senior level Technology Group research analyst to have a salary of $100,000 - $250,000, and also receive a bonus of $5,000,000 - $10,000,000 or higher. The Technology Group bonus pool was funded by 50 percent of technology-related investment banking revenues minus select expenses (including mergers and acquisitions), as well as a percentage of revenue generated by secondary sales and trading in technology stocks and a percentage of Technology PCS revenues. In determining the allocation for each analyst, the Director of Technology Research stated that he would review revenue generated with respect to each company followed by the analyst, including revenues relating to banking, sales, trading, derivatives, high yield, private placements, and specialty gains on the desk. That amount of revenue formed the "starting point" of determining an individual's bonus, after which additional factors such as the analysts' rating in polls were considered. The Director of Technology Research made an initial recommendation regarding the bonus component of a research analyst's compensation. The final decision was made by three people: Quattrone, and the heads of the Technology Group Mergers and Acquisitions and Corporate Finance departments.
25. The influence of investment banking revenue to the bonus is evidenced in an e-mail from Quattrone to Technology Group officers, including officers in the research department. The subject line of the e-mail included "Please submit your revenue sheets if you want the highest bonus possible." In the e-mail, Quattrone wrote in part, "Your trusty management team is meeting ... to determine compensation for the group...." The message then urged all the officers to submit a list of the banking deals they participated in so as to ensure a complete list for determining compensation. The emphasis on a research analyst's contribution to investment banking revenues, along with the influence of Quattrone and other department head in determining compensation, created a conflict of interest for analysts who were charged with the responsibility of preparing and issuing objective research reports.
D. Investment Bankers Evaluated Research Analysts'
26. From July 1998 through 2001, investment bankers who worked with equity research analysts on investment banking deals, in both the Equity and Technology Groups, participated in the analysts' annual performance evaluations, which in turn affected analysts' bonuses. This input from investment bankers provided a further incentive to equity research analysts to satisfy the needs of investment bankers and their clients, and placed additional pressure on research analysts to compromise their independence.
27. In 2000, CSFB investment bankers used a specific form, entitled "Evaluation By Banking and Equity Capital Markets Professionals," in order to evaluate equity research analysts. On the form, investment bankers reviewed the work of specific research analysts under different categories and provided an overall ranking for the analyst.
28. As an example, in one section called "Business Leadership," an investment banker wrote of a research analyst: "Coordinates ideas in support of Banking Business; good commercial instinct. Develops and utilizes relationships with client Senior Management, including CEO's, in pursuing business. Represents firm well."
29. The conflict between conducting objective research and attracting and retaining investment banking clients was also evidenced in analysts' self-reviews. For example, one analyst wrote in his self-evaluation: "Trying to manage the research/banking balance. Particularly challenging for me given the amount of banking we do and our dominant banking franchise that has deep roots at CSFB."
E. CSFB's Technology Research Analysts Played a
30. Between July 1998 and 2001, Technology Group research analysts played a key role in helping to win investment banking business for CSFB. Once CSFB's technology bankers - with the assistance of the technology research analysts - determined that a company was a strong candidate for an offering, a technology research analyst assisted in CSFB's sales "pitch" to the company, in which CSFB would explain why it should be chosen as the lead managing underwriter for the offering. Quattrone described the relationship between the technology research analysts and investment bankers as follows: "[I]n many of the things that we did with our clients, both groups [Technology Banking and Technology Research] were involved. And the clients experienced CSFB, and in some sense both bankers and analysts worked together in a collaborative fashion to deliver service to a client."
31. As part of the sales pitch, technology research analysts prepared selling points regarding their research to be included in the pitch books presented to the company. They also routinely appeared with investment bankers at the pitches to help sell CSFB to the potential client. The Director of Research for the Technology Group described the technology research analyst as the "star of the show" at pitches. CSFB pitch books to potential clients included representations about the role the technology research analyst would play if CSFB obtained the business. The analyst's written and oral presentations, and the presence of a research analyst at the pitch, strongly implied and at times implicitly promised that CSFB would provide positive research if awarded the investment banking business.
32. For example, in the pitch book for Numerical Technologies, the discussion regarding research coverage headlined "Easy Decision...Strong Buy," implicitly promising that CSFB would issue a "strong buy" rating upon initiation of coverage. In another example, in a Fall 1999 pitch to a different technology company, CSFB's pitch book stated that the particular CSFB technology research analyst who would cover the company "[g]ets it," would "pound the table" for the company, and would be the company's "strongest advocate." In addition, the pitch book stated that research analyst would engage in "pre-marketing one-on-one meetings [with potential investors] prior to launch."
33. In describing the "Role of Research," the pitch book provided a roadmap for the amount and type of coverage that the equity research department would issue in the first year after initiating research, including some research issued at least monthly and inclusion of the company's stock as a "focus stock." The pitch book noted that CSFB's equity research department would also provide (a) "[s]ignificant `front-end' effort to position the company's story in a prospectus and at roadshows"; (b) a "[s]ales force `teach-in' to begin communicating the [company's] opportunity to investors"; (c) "active involvement on roadshow"; (d) "[d]irect follow-up with key investors after one-on-one meetings"; and (e) "standalone" company reports.
34. In another pitchbook, CSFB highlighted that it maintained the highest post-IPO trading volume in a company whose public offering it led while noting that other investment banks did not maintain similar trading volume for their banking clients. At the same time, CSFB highlighted that its research analysts maintained a "strong buy" rating even though the company announced results below estimates. In the pitchbook, CSFB distinguished itself from other deal managers who were shown to have reduced their ratings based upon that financial information. CSFB implied through this pitchbook that the firm would maintain positive research for companies that entered into investment banking deals with CSFB.
F. Equity Research Analysts Were at Times
35. CSFB investment bankers, including senior bankers, at times pressured research analysts to initiate or maintain coverage on companies to further ongoing or potential investment banking relationships. Bankers at times applied undue pressure on equity research analysts to initiate research on companies they otherwise would not have covered, maintain ratings they otherwise would have lowered, and maintain coverage of companies they otherwise would have dropped, but for the investment banking relationship.
36. In June 1999, CSFB's Technology Group investment bankers learned from a corporate official at Gemstar-TV Guide International, Inc. ("Gemstar") that the company was interested in conducting a secondary offering of its stock. Company officials informed the CSFB investment bankers that publication of research by CSFB was a prerequisite to CSFB being named the investment banker for the planned offering. A Technology Group investment banker informed the company official that CSFB would initiate coverage by July. The investment banker then informed the analyst of the potential investment banking business and noted that it was conditioned on CSFB initiating research for the company. When the research analyst informed the investment banker that other obligations, including administrative responsibilities, would keep him from conducting the necessary research in the time frame mentioned by the banker, Quattrone challenged the research analyst's priorities and directed that he conduct the review of the company on a more aggressive schedule.
37. On June 15, 1999, an investment banker in the Technology Group wrote an e-mail to the research analyst with a copy to Quattrone, stating that one of Gemstar's representatives had
38. Later that day, the research analyst e-mailed the investment banker, with a copy to Quattrone, stating that he could not even look at the matter for almost another three weeks, given his need to study for an examination. In response to that e-mail, Quattrone instructed the research analyst by e-mail to "take a day off from your test prep and go down this week or next." Quattrone then e-mailed the chain of messages to the heads of other Technology Group departments and another individual, noting that Quattrone was "trying to shame" the research analyst into conducting the due diligence and ultimately initiating research coverage of the company without delay.
39. Another example of this kind of conduct relates to Allaire Corp. ("Allaire"), which develops and supports software for a variety of web applications. In January 1999, CSFB acted as the lead manager for Allaire's IPO, earning more than $3.5 million from the offering. CSFB was also the lead manager of a secondary offering for Allaire in September 1999. The total fees for that offering exceeded $10 million. On February 19, 1999, CSFB initiated coverage of Allaire with a "buy" rating. CSFB continued to cover and issue research on Allaire until the research analyst covering the company left CSFB in April 2000. At the time of his departure, when the stock was trading at approximately $130 per share, the research analyst had a buy rating on the company. Another research analyst was tapped to assume coverage of Allaire at that time.
40. The new research analyst's assumption of coverage was delayed and, as of early July 2000, the analyst assigned to cover Allaire had issued no new research on the company. In a July 17, 2000 e-mail to Quattrone, the Head of Technology Research, and others, a CSFB investment banker insisted that "[w]e need to do everything in our power to ensure that" the new research analyst "initiates coverage on Allaire." In that e-mail, the investment banker noted, among other things, that CSFB had received favorable fees and splits in connection with its underwriting services for the IPO, the secondary, and another transaction, and that Allaire's CEO was unhappy with CSFB's research sponsorship of Allaire since late 1999. In a responsive e-mail, Quattrone stated: "We need to make this happen asap." On August 14, 2000, a new research analyst assumed coverage of Allaire, maintaining the previous analyst's buy rating while the stock was trading between $30 - $35 per share. A month later, on September 18, 2000, once the stock had dropped below $10 per share, the research analyst downgraded the stock to a "hold" rating.
41. On one occasion, Quattrone urged certain bankers and research analysts to threaten to drop coverage of a company in an effort to obtain the lead manager position for an investment banking offering. In January 2000, CSFB was attempting to obtain a lead manager position for Aether Systems, Inc. ("Aether"). When informed that Aether had offered CSFB only the co-manager role, not the bookrunner position, for the offering, Quattrone attempted to use his authority by stating in a January 29, 2000 e-mail to investment bankers and research analysts:
G. CSFB Technology Group's Practice of Allowing Equity Research Analysts to Discuss a Proposed Rating
42. CSFB Technology Group allowed its research analysts to provide executives of companies for which they were about to issue research with copies of analyses and proposed ratings of their reports for editorial comment prior to dissemination. Technology Group research analysts provided this information, in part, in an attempt to maintain their good standing with the company. This type of direct interaction between analysts and issuers put additional pressure on the equity research analysts and at times compromised the independence of the research analysts.
43. For example, on October 29, 1999, while preparing to re-initiate coverage for Razorfish, Inc. ("Razorfish"), a Technology Group research analyst wrote to the Razorfish CEO:
44. The CEO of Razorfish responded to the research analyst, stating: "I think we should re-initiate with a buy and a higher price target and keep the upgrade for a little while.... Although its [sic] getting hard to justify the valuations."
45. In this case, the research analyst re-initiated coverage on November 3, 1999 with a strong buy rating when the stock was trading at $34. He reiterated and maintained that strong buy from January 12, 2000, when the stock was trading at $39 per share, until October 27, 2000, when he finally lowered his rating to a buy rating when the stock was trading at $4. The research analyst maintained that buy rating until May 4, 2001, when Razorfish was trading at just $1.14. At that time, he once again downgraded to a hold rating.
II. CSFB ISSUED FRAUDULENT EQUITY RESEARCH REPORTS
46. The undue, improper influence that investment banking exerted over research analysts caused technology research analysts to issue fraudulent research reports on two companies, Digital Impact and Synopsys. Specifically, investment bankers pressured research analysts to initiate or maintain positive research coverage of these two companies in order to obtain or retain investment banking business. The analysts were pressured or compelled to compromise their own professional opinions regarding companies at the direction of the firm's investment bankers.
A. Digital Impact
47. Digital Impact is a company involved in online direct marketing. CSFB acted as the lead manager for the Digital Impact IPO in November 1999, earning more than $5 million from the offering. Following the IPO, a CSFB technology research analyst initiated coverage with a "buy" rating. At that time, Digital Impact traded for just under $50 per share. Between January 2000 and April 2001, as the stock price declined to less than $2 per share, CSFB maintained either a "buy" or a "strong buy" rating on the stock.
48. In May 2001, after the original analyst had left CSFB, a senior research analyst in the Technology Group was assigned coverage of Digital Impact. At that time, Digital Impact was trading for less than $2 per share. CSFB assumed coverage with "buy" ratings in June and July 2001. Thereafter, the senior research analyst met with the company and determined that he wanted to drop coverage of Digital Impact, noting that Digital Impact's "market opportunity was just very competitive ... and ... they were going to have ... a difficult time thriving in that environment."
49. The senior research analyst attempted to drop coverage of Digital Impact on two occasions. On both attempts, the senior research analyst acceded to requests from an investment banker in the Technology Group that he not drop coverage. In a September 4, 2001 e-mail, the senior research analyst informed two investment bankers of his continued desire to drop coverage of Digital Impact. That day, one of the investment bankers responded:
50. Despite his own desire to drop coverage of the stock, the research analyst acceded to the desires of the investment banker and did not drop coverage on Digital Impact. The research analyst maintained coverage, and left the "buy" rating unchanged until October 2, 2001, when CSFB downgraded Digital Impact to a "hold" rating.
51. Internal e-mail correspondence among research analysts regarding Synopsys shows that the pressure imposed by investment bankers on research analysts to initiate or maintain favorable coverage was not an isolated problem at CSFB. In May 2001, a technology research analyst wrote an e-mail to the Head of Technology Research, complaining of
52. The research analyst wrote that, after downgrading a company in 1998, his investment banking counterpart "informed [him] of unwritten rule number one: that `if you can't say something positive, don't say anything at all.'" Regarding a second company about which he had reported in 1999, the analyst wrote that he
53. The technology research analyst applied these "unwritten rules" to Synopsys, which he had rated as a "strong buy" from July 1999 through June 2000. Specifically, the technology research analyst wrote that he
54. Based on these incidents, the analyst concluded that he was "not naïve enough to lack a sense of appreciation of the role of investment banking (and banking fees) for the franchise."
III. CSFB ISSUED RESEARCH ON FOUR COMPANIES THAT
55. As to four companies, CSFB's equity research analysts issued research that violated NASD and NYSE advertising rules because the research lacked a reasonable basis for the claims made, made exaggerated or unwarranted claims, failed to provide a balanced presentation of the relevant facts, and/or failed to disclose important information about the company or CSFB's and its research analysts' relationship to the company.
56. In April 2000, CSFB acted as lead manager on the IPO of Numerical Technologies for which it received a fee of more than $5.4 million. Following the IPO, a Technology Group research analyst informed a company official that he planned to initiate coverage with a "buy" rating. The official complained about the proposed rating to an investment banker at CSFB. According to the analyst, the investment banker successfully urged the analyst, "against [the analyst's] better judgment," to initiate coverage with a "strong buy" rating.
57. In certain instances, CSFB equity research analysts maintained positive ratings in published research reports, while conveying a more negative outlook regarding the stock to their institutional customers within the text of the written research reports. In describing the ratings used from July 1998 through 2001 and beyond, research analysts did not use the same description of the rating as CSFB's published description. According to one senior research analyst:
58. This approach manifested itself with regard to Agilent. CSFB was a co-lead manager for the company's November 17, 1999 IPO, earning more than $5.7 million in fees therefrom. A technology research analyst initiated coverage of the company with a "buy" rating on December 13, 1999. On July 21, 2000, the analyst reiterated his "buy" rating, while also describing in his research report that the company had announced that its healthcare business was likely to have an operating loss at least as wide as the previous quarter's loss of $30 million. The report reiterating the "buy" rating also disclosed in the body of the report that the company announced that third quarter earnings would be 18-22 cents per share, compared to the 35 cents average estimate of analysts polled.
59. The report also indicated that "Agilent is rated Buy, only in the most generous sense, though in the short term we would only buy it on extreme weakness, with a 12-24 month time horizon. Our near-term concern is that problems are not typically resolved in one or two quarters."
60. CSFB maintained its "buy" rating until February 2001 when it finally downgraded to "hold." This came only after Agilent preannounced second quarter revenues and suspended earnings guidance for the remainder of the year, citing a "dramatic slowdown in customer demand." CSFB's positive rating of Agilent for an extended period of time despite negative news was cited by a research analyst in CSFB as an example of maintaining a positive rating while signaling negative news to large institutional clients.
61. Following the July 21, 2000 report on Agilent, a CSFB technology research analyst cited the coverage of Agilent to another CSFB research analyst who was facing some "tough decisions" on rating two companies that CSFB had helped take public. The first analyst noted that he wanted to give one of the companies a neutral rating but was "wondering how to approach this based on banking sensitivities." The other analyst responded by suggesting that the analyst "ask [the analyst who covered Agilent for the July 21, 2000 report] about the `Agilent Two-Step'. That's where in writing you have a buy rating (like we do on [the other company], and thank God it's not a strong buy) but verbally everyone knows your position."
62. Winstar, a provider of broadband telecommunications services, traded on the Nasdaq National Market using the symbol WCII. Winstar competed in the capital-intensive competitive local exchange carrier ("CLEC") industry with much larger, established regional Bell operating companies to provide "last-mile" networks to businesses.
63. Winstar never operated at a profit, suffered significant losses, and needed large amounts of capital to survive. As of September 30, 2000, it had more than $2 billion in accumulated deficits. For the year ended December 31, 2000, Winstar had revenue of $759.3 million, a net loss of $894.2 million, and ($9.67) in earnings per share. Net loss to common stockholders totaled more than $1 billion. On April 5, 2001, Winstar announced a scaled-back business plan and the layoff of 2,000 employees - 44 percent of its work force. On April 18, 2001, Winstar filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code.
64. CSFB, acting through two research analysts in its Equity Research Department, wrote and issued research reports during 2001 that lacked a reasonable basis for its target price and failed adequately to disclose risks of investing in Winstar. Indeed, CSFB's reports issued during this period did not indicate that investing in Winstar was risky. The firm had initiated equity research coverage of Winstar in May 2000, with a "strong buy" rating and a 12 month target price of $79. CSFB retained the $79 target price from January 5, 2001 through April 3, 2001, even as the stock plummeted from approximately $17 to $0.31 per share and the market capitalization collapsed more than 99 percent, from $1.6 billion to $30 million.
65. The following graph demonstrates how CSFB maintained a "strong buy" rating while Winstar's stock price fell:
1. CSFB Lacked a Reasonable Basis for the $79 Target Price
66. In three reports between March 1, 2001 and April 5, 2001, when CSFB suspended its rating for Winstar, CSFB's $79 target price for the company was not reasonable. The target price failed to reflect Winstar's deteriorating stock price, extensive funding needs, likely changes in fundamentals, and over-leveraged balance sheet, as well as the bleak capital markets environment. The target price of $79 per share represented unreasonably high returns:
67. From March 1, 2001 forward, CSFB's target price was more than 50 percent higher than the target price of any other firm covering Winstar.
68. Reports issued in 2001 also failed to disclose that the terms "target price," "price objective," or "percentage upside" did not represent the price at which CSFB believed Winstar stock would be trading in 12 months. Instead, CSFB used those terms to reflect the theoretical value of Winstar's worth in 12 months if a buyer valued Winstar using CSFB's valuation methodology. CSFB, however, failed to disclose that it was using the terms in this manner.
2. CSFB Failed Adequately to Disclose
69. The January 5, 2001, January 8, 2001, and March 1, 2001 reports failed adequately to disclose the risks of investing in Winstar, particularly the risks related to funding, including Winstar's need to raise more than $3 billion to fund its business plan to reach a free cash flow positive status and the risk that Winstar might not be able to raise the necessary funds.
70. In a March 13, 2001 research report, CSFB again failed adequately to disclose the risks of investing in Winstar. While disclosing for the first time that Winstar needed to raise more than $3 billion, the report significantly downplayed the risk that Winstar might not be able to do so:
71. While CSFB research reports identified certain issues relating to funding, those reports did not adequately disclose funding risks or other concerns regarding funding that CSFB equity analysts discussed in internal e-mails. On February 8, 2001, a CSFB equity analyst sent an e-mail with a chart showing Winstar's cash flows. The e-mail stated:
72. Such analysis should have been included in CSFB's disseminated research in order to present a balanced picture of the risks of investing in Winstar.
73. On March 22, 2001, CSFB's senior Winstar equity research analyst e-mailed a customer who had raised questions about investor concerns and funding in the CLEC sector. The analyst acknowledged in his e-mail that there were funding concerns.
74. On April 5, 2001, when Winstar's price closed at $0.44, CSFB issued a report suspending its rating. In the report, CSFB explained that the suspension was
75. CSFB had not adequately disclosed in earlier reports the concerns mentioned in the April 5, 2001 report.
76. CSFB at times had a proprietary interest in NPW that was not disclosed in research reports issued by the firm. Further, CSFB research analysts covering NPW also had personal proprietary interests in the company, but the firm failed to disclose those interests in the disseminated reports. The ownership interests of the firm and the research analysts created a conflict of interest that should have been disclosed.
77. NPW was incorporated in November 1999 as EMW Energy Services Corporation, a division of Enron Energy Services (a division of Enron Corporation ("Enron")). Until January 6, 2000, Enron held all issued and outstanding shares of NPW. In January and July 2000, DLJ assisted with two private placements for NPW and received approximately $1 million in investment banking fees. DLJ invested $42.5 million in the two private placements through its affiliated partnerships, known as the "DLJ Merchant Banking Partnerships," in return for approximately 9.7 percent of NPW.
78. On October 5, 2000, NPW conducted an IPO and offered 24 million shares at $21 per share. DLJ and CSFB were the joint lead underwriters and earned approximately $15.7 million in fees. After the IPO, CSFB, through its acquisition of DLJ, owned 7.9 percent of NPW, while Enron owned 44 percent of the company. In 2000, CSFB and DLJ received more than $12.1 million in investment banking revenues from Enron. In 2001, CSFB received approximately $21.6 million in investment banking revenues from Enron.
79. From October 2000 to November 2001, CSFB issued 18 "buy" or "strong buy" research reports on NPW. CSFB failed to disclose its proprietary interest in NPW in four of these research reports issued during that period.
80. Also during that period, the senior research analyst covering NPW held undisclosed investments in NPW. The senior analyst invested approximately $21,000 of his own money, which was leveraged 5:1 by CSFB, in NPW through DLJ partnerships that owned NPW shares. In addition, an associate research analyst who assisted in preparing the reports, and whose name appeared on the reports, held 200 shares of NPW from November 7, 2000 to June 14, 2001. From October 2000 to November 2001, CSFB did not disclose either of the research analysts' financial interests in the 18 NPW research reports issued during that period.
IV. CSFB'S TECHNOLOGY PCS GROUP ENGAGED IN
81. Quattrone established the Technology PCS (Private Client Services) Group to be part of the Technology Group. The Director of Technology PCS had a primary and direct reporting responsibility to Quattrone with a secondary "dotted-line" reporting responsibility to the Director of CSFB's PCS Department. Technology PCS focused exclusively on the technology sector. Technology PCS operated independently of CSFB's other PCS brokers. The Technology PCS client base consisted, almost exclusively, of officers of investment banking clients of the Technology Group.
82. From approximately March 1999 through April 2001, Technology PCS improperly allocated "hot" IPO stock to executives of investment banking clients and improperly managed the purchase and sale of that stock through discretionary trading accounts. CSFB's Technology Group gave improper preferential treatment to these company executives with the belief and expectation that the executives would steer investment banking business for their companies to CSFB.
83. These executives profited from their allocations of "hot" IPO stock. During this time period, the share value of the technology-related IPOs in which CSFB served as bookrunning manager increased dramatically, with the average share price increase in the immediate aftermarket exceeding 99 percent. In some instances, the aftermarket trading was significantly higher. On December 9, 1999, for example, IPO shares of VA Linux Systems stock, which had a public offering price of $30 per share, closed after the first day of aftermarket trading at $239.25 per share, representing a 698 percent increase over the offering price. Technology PCS began selling its clients' VA Linux IPO shares on a discretionary basis when the stock was at $227 per share. Technology PCS allocated 92,000 VA Linux IPO shares to 110 discretionary accounts. Within one day of the offering, the Technology PCS brokers sold 41,400 shares (representing approximately 45 percent of the Technology PCS allocation) out of the discretionary accounts, resulting in one-day realized profits of almost $6.4 million.
A. Discretionary Accounts Were Established
84. Pitchbooks used by the Technology Group to win an issuer's investment banking business referenced the discretionary accounts. Consistent with those references and representations made at "pitches," an issuer had to award CSFB its investment banking mandate before the issuer's officers were afforded the opportunity to open discretionary accounts and given access to IPO shares by CSFB. Likewise, CSFB considered ways to reduce or eliminate IPO allocations to executives who changed employment and were no longer affiliated with those companies.
85. Once Technology Group received a mandate, Technology PCS established discretionary accounts for executives who were considered to be "strategic." "Strategic" was commonly understood by Quattrone and Technology PCS managers to refer to the overall business relationship CSFB had with the issuer, including potential future investment banking business. The head of Technology PCS defined "strategic" as "senior decision makers" at existing or prospective investment banking clients of the Technology Group who could influence their companies' choice of investment banker. The accounts were ranked based on the executive's perceived influence in this regard, and "hot" IPO shares were allocated based on the ranking. Allocations ranged from 1200 shares for accounts ranked "1" to 300 shares for accounts ranked "4."
86. Technology PCS did not apply standard CSFB qualification standards (i.e., assets under management, trading revenue production, length of the brokerage relationship, etc.) for the opening of these discretionary accounts. Instead, the decision was based largely on the executive's position and influence at the company. Technology PCS established a minimum funding level of $100,000 that was subsequently raised to $250,000. Technology PCS also set $250,000 as the maximum level of funds with which customers could fund the discretionary accounts. These discretionary accounts were limited to the purchase and sale of stock purchased through CSFB IPOs. The account holders were not permitted to buy or sell other securities in these accounts, as a result of which Technology PCS turned away millions of dollars of potential customer investments. The number of discretionary accounts serviced by Technology PCS reached a peak in 2000 of approximately 285.
B. Technology PCS Allocated Shares in Every IPO to the
87. The Technology PCS Group allocated shares to the discretionary accounts in every IPO in which the Technology Group was involved. Senior Technology Group managers participated in determining allocations to discretionary accounts and deciding for whom such accounts were to be opened. The overwhelming majority of those IPOs were "hot." Technology PCS personnel decided when and how many IPO shares to sell from the discretionary accounts. In some cases, all the shares allocated to discretionary accounts were sold for a profit on the IPO's first day of trading in the secondary market. In other cases, half the shares were sold within one or two days of the offering and the remaining half sold sometime later. In virtually all instances, the "flipping" of IPO shares out of the discretionary accounts resulted in the account holders receiving substantial profits with no individual effort and minimal market risk.
88. The table below provides examples of the extraordinary gains realized in these discretionary accounts and correlates them with the investment banking fees paid to CSFB by the companies with which the accountholders were associated:
C. Unofficial "Performance Reports" Were Developed by Technology
89. Technology PCS prepared unofficial "Performance Reports" measuring the extraordinary performance of these discretionary accounts and furnished the reports to the discretionary account holders. These reports, distributed monthly, showed, among other things, the length of time the account had been open, the amount of contributions to the account, the total gain in the account (before fees) and the account's rate of return. These unofficial reports were meant to ensure that the discretionary account holders were aware of the extraordinary gains being generated for them through the flipping of IPO shares. Some show total gains over the life of the account exceeding $1 million. One report shows that in little more than a year and a half (September 19, 1999 to June 8, 2001), the account had a rate of return in excess of 3,800%.
FIRST CLAIM FOR RELIEF
[Violation of Sections 15(c)(1), Rule 15c1-2 Thereunder, and
90. Paragraphs 1-89 are realleged and incorporated by reference.
91. Section 15(c)(1)(A) of the Exchange Act [15 U.S.C. § 78o(c)(1)] provides, in relevant part, that
92. Exchange Act Rule 15c1-2 [17 C.F.R. § 240.15c1-2] provides, in relevant part, that the term "manipulative, deceptive, or other fraudulent device" as used in Section 15(c)(1)(A) of the Exchange Act includes (a) "any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person" and (b) "any untrue statement of a material fact and any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, which statement is made with knowledge or reasonable grounds to believe that it is untrue or misleading."
93. Section 15(c)(2)(A) of the Exchange Act [15 U.S.C. § 78o(c)(2)] provides, in relevant part, that
94. NASD Conduct Rule 2110 requires members to observe high standards of commercial honor and just and equitable principles of trade.
95. NASD Conduct Rule 2210(d)(1)(A) states:
96. NASD Conduct Rule 2210(d)(1)(B) prohibits members from making "[e]xaggerated, unwarranted or misleading statements or claims" in all public communications and states that "no member shall, directly or indirectly, publish, circulate or distribute any public communication that the member knows or has reason to know contains any untrue statement of a material fact or is otherwise false and misleading."
97. NASD Conduct Rule 2210(d)(2)(B) requires, among other things, that members have a reasonable basis for all recommendations made in advertisements and sales literature.
98. NASD Conduct Rule 2210(d)(2)(C) prohibits members from making, among other things, "promises of specific results, exaggerated or unwarranted claims or unwarranted superlatives, opinions for which there is no reasonable basis, or forecasts of future events which are unwarranted" in communications with the public.
99. NYSE Rule 401 requires that member organizations adhere at all times to the principles of good business practice in the conduct of their business affairs.
100. NYSE Rule 472 provides, among other things, that
101. NYSE Rule 476(a)(6) prohibits members from engaging in conduct or proceeding in a manner inconsistent with just and equitable principles of trade.
102. As alleged above, CSFB issued research reports regarding Digital Impact and Synopsys that were fraudulent, false and misleading, and that contained recommendations that were contrary to the analysts' private views.
103. By reason of the foregoing, CSFB violated Section 15(c)(1) of the Exchange Act, Rule 15c1-2 thereunder, Section 15(c)(2) of the Exchange Act, NASD Conduct Rules 2110, 2210(d)(1) and 2210(d)(2), and NYSE Rules 401, 472, and 476(a)(6).
SECOND CLAIM FOR RELIEF
[Violations of NASD and NYSE Rules by Publishing Misleading,
104. Paragraphs 1-89 and 94-101 are realleged and incorporated by reference.
105. As alleged above, CSFB issued research reports on Numerical Technologies, Agilent, and Winstar that were not based on principles of fair dealing and good faith and did not provide a sound basis for evaluating facts, contained exaggerated or unwarranted claims, contained opinions for which there was no reasonable basis, and/or lacked full and accurate disclosures; and it issued research reports on NPW that, at times, failed to disclose that CSFB and its research analysts had proprietary interests in the company.
106. By reason of the foregoing, CSFB violated NASD Conduct Rules 2110, 2210(d)(1), and 2210(d)(2), and NYSE Rules 401, 472, and 476(a)(6).
THIRD CLAIM FOR RELIEF
[Violation of NASD and NYSE Conduct Rules Due to Conflicts of Interest
107. Paragraphs 1-89, 94, 99, and 101 are realleged and incorporated by reference.
108. During the relevant period, CSFB engaged in the acts and practices described above that created and/or maintained inappropriate influence by investment banking over research analysts and therefore imposed conflicts of interest on its research analysts. CSFB failed to manage these conflicts in an adequate or appropriate manner.
109. By reason of the foregoing, CSFB violated NASD Conduct Rule 2110 and NYSE Rules 401 and 476(a)(6).
FOURTH CLAIM FOR RELIEF
[Violation of Section 17(a)(1) of the Exchange Act, Rule 17a-3 Thereunder, and
110. Paragraphs 1-89, 94, 99, and 101 are realleged and incorporated by reference.
111. Section 17(a)(1) of the Exchange Act [15 U.S.C. § 78q(a)(1)] and Rule 17a-3 thereunder [17 C.F.R. § 240.17a-3] require that each member of a national securities exchange, broker, or dealer shall make and keep certain books and records. Rule 17a-3 requires that broker-dealers make and keep a record of the terms and conditions attached to each order placed for the purchase or sale of securities. Such books and records must be accurate.
112. NASD Conduct Rule 3110 requires a member firm to "make and preserve books, accounts, records, memoranda, and correspondence in conformity with all applicable laws, rules, regulations, and statements of policy promulgated thereunder," as well as with the NASD's own Rules.
113. NYSE Rule 440 requires that every member make and preserve accurate books and records in conformity with SEC and NYSE rules and regulations.
114. As alleged above, CSFB engaged in improper IPO "spinning" and distribution practices. Further, CSFB failed to maintain accurate books and records in connection with its IPO spinning and distribution practices.
115. By reason of the foregoing, CSFB violated Section 17(a)(1) of the Exchange Act and Rule 17a-3 thereunder, NASD Conduct Rules 2110 and 3110, and NYSE Rules 401, 440, and 476(a)(6).
FIFTH CLAIM FOR RELIEF
[Violations of NASD and NYSE Rules by Failing to Supervise]
116. Paragraphs 1-89 are realleged and incorporated by reference.
117. NASD Conduct Rule 3010(a) requires members, among other things, to "establish and maintain a system to supervise the activities of each registered representative and associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with" NASD's own Rules.
118. NYSE Rule 342 requires members, among other things, to maintain "appropriate supervisory control" over all business activities to ensure compliance with securities laws and regulations, including providing a "separate system of follow-up and review to determine that the delegated authority and responsibility is being properly exercised."
119. As alleged above, CSFB failed to establish and maintain reasonable or appropriate procedures and controls to protect research analysts from conflicts of interest from its investment banking operation and to supervise the participation of research analysts in investment banking activities. CSFB also failed reasonably or appropriately to supervise its research analysts to provide reasonable assurances that its research reports complied with federal laws and regulations as well as NASD and NYSE rules. Further, CSFB failed reasonably or appropriately to supervise its employees with regard to IPO spinning and distribution practices.
120. By reason of the foregoing, CSFB violated NASD Conduct Rule 3010 and NYSE Rule 342.
PRAYER FOR RELIEF
WHEREFORE, the Commission respectfully requests that this Court enter final judgment: