J.P. Morgan Chase

Morgan Stanley is one of the largest investment banking firms in USA. The global securities market is one of Morgan Stanley’s primary business arenas. The firm serves both individual and institutional investors. Along with several other high-profile firms, Morgan Stanley has recently endured a number of questions about conflicts of interest and potential fraud.

When was the possible fraud discovered ?
Top Wall Street firms have recently been required to pay large fines to regulators for alleged partiality in their stock reports to investors. In December 2002, a preliminary agreement was reached with 12 U.S. investment banks in which they agreed to pay a combined total of over 1 billion dollars. The Securities and Exchange Commission (SEC) and state regulators brought accusations against the banks in the preceding months, alleging that investment banks had let conflicts of interest color their stock reports.

Morgan Stanley has also been individually targeted by the world’s leading luxury item maker, LVMH. The leadership at LVMH has accused Morgan Stanley of allowing a conflict of interest to interfere with its research reporting. Gucci, a long-time rival of LVMH, has close ties with Morgan Stanley. While LVMH claims that this relationship caused Morgan Stanley to unfairly spin its stock reports to investors, Morgan Stanley is vehemently denying any accusation of fraud. The lawsuit by LVMH was filed in a French court in November.

What type of fraud is alleged to have been committed ?
The charges filed by the SEC and state regulators against a host of investment banks are roughly synonymous to the accusations against Morgan Stanley by LVMH. Both claim that conflicts of interest have contributed to dishonest stock reports to investors. If LVMH wins its case against Morgan Stanley, it will be because it shows convincing evidence that the securities firm put its interest in Gucci ahead of its duty to present investors with an accurate picture of stocks’ value.

UBS Warburg

Based in Switzerland, UBS Warburg is one of the world’s foremost financial firms. Among its various connections to other companies, it serves as sister company to Paine Webber, Inc., providing the latter with research and analysis. In 2002, both companies were named in a class action lawsuit filed by former investors, who allegedly suffered losses as a result of actions perpetrated by UBS.

Why was UBS accused of fraud?

UBS Warburg was accused of knowingly deceiving investors when it rated Enron’s stock as a “strong buy” during a period in which Enron was headed for certain disaster. Enron’s own employees were the biggest victims in the alleged scheme; through an arrangement with UBS Warburg’s sister company, Paine Webber, they were encouraged to invest their 401(k) contributions in Enron. Plaintiffs say that the arrangement forbid Paine Webber’s brokers from warning these employees about the pending downfall of their employer. Plaintiffs cited one broker’s dismissal as evidence of this: Chung Wu was fired, they claim, after advising investors to “diversify” their investments. The defendants say Chung was fired because his advice was unauthorized.

The suit alleged that appalling debt and credit problems were clear “red flags” of Enron’s impending doom, and that UBS Warburg therefore should have avoided rating Enron as a strong buy. Plaintiffs in the suit claimed that UBS Warburg waited until four days prior to Enron’s bankruptcy filing before warning investors. By doing so, said the plaintiffs, UBS and sister company Paine Webber, Inc. were able to collect more fees from their client, Enron. The companies were accused under both Section 10(b)(5) and Sections 11 and 12 of the Exchange Act, which prohibit misrepresentation.

UBS Warburg and Paine Webber countered that the information they were accused of hiding from investors was available to the public. They said that the plaintiff’s accusations were based on speculation as to their knowledge of facts that went beyond this information.

Merill Lynch

Sometime in 2001, Merrill Lynch was found to have been publicly promoting investments that they had privately damned. It is suspected that these false statements were made to secure investment banking deals with the companies whose stock was being advocated.

One of these clients is believed to be deposed energy leader Enron. In 1998, a sequence of events unfolded in which the Merrill Lynch analyst responsible for the downgrade of Enron’s stock appraisal resigned, the stock was upgraded, and the two struck several deals for lucrative stock offerings.

New York state Attorney General Eliot Spitzer took the lead in investigating Merrill Lynch’s practices, finally reaching a settlement that included a fine and Merrill Lynch promises to correct the scandalous practices.

When did the wrongdoing first come to light?

While allegations against brokers have been aired in congressional hearings and on Wall Street for some time, ground may have been broken on the current Merrill Lynch scandal in July 2001, when the brokerage firm was forced to reimburse approximately $400,000 to a former client. The client, Debases Kanjilal, had invested based upon the advice of his personal broker and analyst Henry Blodget. Kanjilal and his lawyer believed they had evidence that Blodget and Merrill Lynch had some interest in the success of the stock, Infospace, Inc.

The current case against Merrill Lynch began to gather steam in April 2002. At this point, Spitzer made known that he had evidence – in the form of emails and sworn testimony – that analysts had privately emphasized the unattractiveness of stocks publicly characterized as sure things.