(FORTUNE Magazine) – A company whose shares were puffed up by aggressive accounting and fuzzy financial information. Brokerage giants hungry for investment banking deals. And Wall Street analysts who missed obvious signs that the numbers didn't add up. That is the sad story that's been unfolding at Boston Chicken in recent weeks. On the face of it, the falling to earth of this fast-food darling looks like run-of-the-mill profit taking at the expense of the small investor. But scratch beneath the surface, and you discover that the Boston Chicken story has so much more: ignorance, shortsightedness, self-interest, and, of course, greed.

As you may already know, Boston Chicken shares have plunged 50% in the past three months, just as brokerage firms touted its stock and helped the company sell nearly $300 million in bonds. Boston Chicken's shareholders aren't the only ones who got plucked either. The company--known by Wall Street types in this Seinfeldian era as "the Chicken"--owns a majority stake of Einstein/Noah Bagel Corp., commonly referred to as "the Bagel." And the Bagel has suffered right along with the Chicken, dropping 24% in the past month. Meanwhile, those recently issued bonds are also off sharply, following the common stock's downward trajectory.

How did so many people end up getting burned so badly? Let's go back to Nov. 9, 1993, when Boston Chicken made headlines as one of the most sought-after IPOs ever. Offered at $10, shares of the Chicken took flight, closing the day at $24.25 for an unheard-of 140% gain. The stock stayed aloft too, even though the company earned only 6 cents a share in 1993. Already familiar to health-conscious consumers, who gobbled up its tasty broiled poultry and side dishes, the company saw a rise in its stock so remarkable that it soon became the talk of commuter trains and suburban Little League games. Individual investors snapped up the stock, eventually driving it north of $40 by late last year.

The Street also loved the Chicken. Not the food at the company's nearly 1,200 franchised and company-owned outlets, but the corporation's rich assortment of lucrative underwriting deals. Because of an aggressive expansion drive and hundreds of millions in loans to franchisees, execs at the Golden, Colo.-based company have had a constant need for fresh cash. Like clockwork, they turned to Wall Street for underwriting help, raising more than $1.5 billion. Not only has this meant tens of millions of dollars in fees, but it also opened the door for additional business from the Bagel. Like its parent, Einstein/Noah has been a repeat customer for the big underwriters, raising $300 million in the past year.

Analysts from the brokerages that backed these offerings have been--you guessed it!--among the strongest supporters of Boston Chicken stock. And although there is no hard evidence that the deals skewed their judgment, it's hard to believe that the company's problems could have come as a surprise. For years, short-sellers and restaurant experts have criticized its sales numbers and earnings assumptions. And in the past 12 months, national business publications such as FORTUNE and Business Week have raised serious questions about the company's accounting methods.

Much of the criticism has focused on Boston Chicken's practice of not factoring in shortfalls at the franchises when determining corporate profits. Instead, these deficits are recorded by 15 "financed area developers." Known as FADs, these regional franchise entities have lost $356 million in the past three years, but you won't find that number in the company's annual report. To discover the losses, you've got to burrow deep into Boston Chicken's SEC filings. It's no wonder management is eager to keep the extent of the losses quiet--they more than cancel out the company's stated earnings since it went public. Says Wayne Daniels, a Schroder Wertheim analyst who turned negative on Boston Chicken shares long before most of his colleagues: The company's financial structure "is designed to decouple reported earnings from economic reality." Boston Chicken has been battling criticisms like these for years, insisting they're baseless. As CFO Mark Stephens says, "We've bent over backward to put out FAD information...We've increased the amount of data we put out." He adds: "We're in choppy water from a store-sales point of view. But that's got nothing to do with accounting."

Truth be told, the trouble is less with Boston Chicken and more with the folks who pushed its stock in spite of the warnings. Those red flags, for instance, didn't prevent analysts from Merrill Lynch, Alex. Brown, and Morgan Stanley--Boston Chicken's recent underwriters--from strongly recommending the stock. Indeed, even as the shares plunged in April amid reports of slowing sales, these three firms pushed through a mammoth $287.5 million bond offering. Despite the sinking stock price and the unusually high yield creditors demanded before buying the bonds, the analysts stuck with their positive ratings. On April 24, two days after the bond deal was completed and with the stock at $22.75, Merrill Lynch's Peter Oakes advised investors that Boston Chicken's "big pullback provides even bigger opportunity" and kept his buy rating on the stock.

Alex. Brown's Steven Rockwell was just as sanguine. He, too, maintained his strong buy rating, telling clients on May 13 that he believed Boston Chicken shares could rebound to $50. Morgan Stanley's Howard Penney also continued to strongly recommend the shares. Over the next few weeks Boston Chicken stock kept dropping while the analysts remained quiet. It wasn't because they were embarrassed--rather, it was because these three companies were managing a $125 million convertible-bond offering for Einstein/Noah Bagel and were barred from publicly commenting on Boston Chicken.

By the time those restrictions were lifted in late May, Boston Chicken's stock was below $20. What's more, company execs were admitting that sales in the first part of the second quarter were weak. Yet the analysts from the three underwriting companies still weren't willing to walk away. "We continue to rate the shares 'strong buy,'" Rockwell told clients on May 28, as the stock sank to just over $18. "We believe the concept remains strong and vibrant." The next day Boston Chicken announced a management shakeup. By June 2, the company was telling analysts it was cutting its headquarters staff by nearly 25% and might slow its ambitious expansion plans. Rockwell finally lowered his rating to buy, and the stock gave up more ground. Morgan Stanley followed suit a day later, as analyst Penney downgraded the stock from strong buy all the way down to neutral. The Chicken closed at $15.13, a 52-week low.

These days, the heat is all on the analysts. They "were in bed with the investment bankers and company management on this one," says Robert Olstein, manager of the Olstein Financial Alert fund and a former shortseller of the stock, echoing money managers and other investors who didn't want to be quoted by name. "Wall Street created the monster because they financed all the company's losses through public offerings." Buyers of the recently issued convertible bonds are also steaming. "I feel ripped off," says one mutual fund head who bought into the offering. "This was a monster-sized deal, and there ought to be some accountability." This manager even called the underwriting desk at Merrill to complain, but, he says, "they just got defensive." Says another buyer of the bonds: "People have a right to be upset. Some of these problems had to be going on for months. I can't believe the analysts didn't see that."

That's unfair, say the analysts involved. "I have never and would never withhold information that was significant to the stock to get a deal done," says Alex. Brown's Rockwell. "My reputation is worth much more than that." Rockwell says he understands that clients are angry, quickly adding that the process hasn't been easy for him either. "You feel like an ass, frankly," he confesses, noting, "I fully expect that more damage has been done to me in two months with Boston Chicken than in five years of recommending other stocks. I'm not a happy guy."

Morgan Stanley's Penney also insists that he recommended Boston Chicken's stock on its merits, not because it's a Morgan Stanley client. "I missed something, obviously," he says. If Penney and Rockwell are apologetic, Merrill Lynch's Oakes is downright defiant, still describing Boston Chicken as a buy and boasting, "I'm the last soldier standing. My credibility is totally independent of what Merrill is doing." At the very least, Oakes suggests, people should give him credit for having the "chutzpah" to stick with his strong buy rating. No doubt Boston Chicken CFO Stephens will give Oakes a couple of Brownie points. "This period is clearly a bump in the road and nothing more," he says. In the past year, Stephens explains, the company put too much emphasis on lunch sales, but now that they've refocused on dinner, he assures, "I feel very good. There is nobody out there with a brand or a set of assets that's better positioned to play."

In the long run, Stephens could well be right. For now, though, that's cold comfort for Raj Seshadri. An individual investor from Kalamazoo, Mich., Seshadri bought 200 shares of Boston Chicken in May, when it was trading at $21. He checked into what analysts were saying, figuring that with all those buy ratings, it was a safe bet. Now he knows otherwise. "I didn't think they'd recommend the stock if there were real problems with it. I guess I was wrong." Caveat emptor, Raj.