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DLJ analyst under scope
Securities regulators reportedly probe questionable DLJ stock recommendation.
September 12, 2002: 7:09 AM EDT

NEW YORK (CNN/Money) - Securities regulators are questioning the activities of another Wall Street analyst who allegedly advised investors to buy shares of a company that he flagged as a bad purchase in an e-mail message, a newspaper reported Thursday.

News of the message from Donaldson, Lufkin & Jenrette analyst Kevin McCarthy follows release of similar e-mails from Merrill Lynch analysts by New York attorney general Eliot Spitzer, and could fuel investor fears of untrustworthy analyst recommendations, the New York Times reported.

The disclosures are part of a broader investigation by regulators in several states into the behavior of Wall Street brokerages. Merrill settled with New York for $100 million without admitting wrongdoing.

The e-mail message, which dates back to November, 2000, was obtained from a person close to the investigation by the Securities and Exchange Commission and the North American Securities Administrators Association, the Times reported.

The e-mails between Elliot Rogers, head of equity research and McCarthy, an analyst at DLJ, which was acquired by Credit Suisse First Boston on Nov. 3, 2000, concern Lantronix Inc., a network device server company. Donaldson managed the firm's initial public offering of the shares on Aug. 4 and several weeks later, McCarthy recommended Lantronix to investors. McCarthy joined Credit Suisse as a technology analyst after the Donaldson acquisition.

In the e-mail, McCarthy tells Rogers that Donaldson investment bankers pressured him to write positively about Lantronix despite the IPO's flop, the Times reported. The price and size of the IPO had been significantly reduced in the days before the IPO. Lantronix shares tumbled 20 percent from the offering price of $10 on its first day of trading.

Nevertheless, McCarthy recommended the stock to investors several weeks later, on Aug. 30, the same day Credit Suisse announced the DLJ acquisition. Lantronix stock had recovered to $10.56, and McCarthy assigned it a 12-month price-target of $17 a share, according to the report. Lantronix shares closed at 70 cents Wednesday.

In the e-mail messages dated Nov. 8, McCarthy said he felt forced to recommend Lantronix by Donaldson investment bankers and that his involvement with the company was "an embarrassment," the Times reported. He also said the bankers had "acted as a proxy for management" of Lantronix and blocked his efforts at an in-depth analysis of the financial statements.

At the time McCarthy wrote the messages, Lantronix stock fell to $5.44, but McCarthy still rated the company a "buy." His report on the company, which he had written at DLJ, was transferred to Credit Suisse, the paper reported.

"I put my reputation on the line to sell this piece" of junk, he wrote, "calling favors from very important clients," the Times reported.

Credit Suisse spokeswoman Victoria Harmon, when asked about the e-mails by the Times, said "early on, we welcomed, fully endorsed and have been implementing the Spitzer initiative to make systemic changes to strengthen analyst independence. We are now working closely with the regulators and government officials on these matters."

The firm declined to make Mr. McCarthy available for comment. Rogers has left the firm and could not be reached, according to the report.  Top of page

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