Mass. regulator probes lender research
BOSTON --Massachusetts' top securities regulator on Tuesday said he issued subpoenas to two Wall Street investment banks as part of an investigation into whether the firms' research analysis ignored subprime lenders' mounting financial problems.
Secretary of State William Galvin said his office is seeking documents from UBS Securities LLC and Bear Stearns & Co. Inc. about their research of firms including
"They've both been issuing very rosy outlooks on New Century until very recently," Galvin said in a phone interview with The Associated Press. "The egregious nature of the errors at a time when these lending firms were experiencing such difficulty raises some very serious questions ... You can't divorce the lenders from those who offer them comfort and support."
A spokeswoman for Bear Stearns said the firm would comply with the subpoena. The spokeswoman, Elizabeth Ventura, also defended recent research on New Century published by Bear Stearns analyst Scott Coren.
UBS spokeswoman Rohini Pragasam said her firm had just received the subpoena and could not yet comment on it. "As a general matter, the firm is proud of its track record for research," she said.
Galvin cited a Bear Stearns analyst's March 1 upgrade of his firm's rating on New Century Financial's stock from "underperform" to "peer perform" -- the terms Bear Stearns uses to advise whether to sell or hold a stock.
In addition, UBS upgraded New Century's stock on Feb. 22 to a "neutral 2" rating, advising to hold the stock.
A review of the March 1 Bear Stearns report shows Coren was not entirely upbeat on New Century's prospects, despite his upgrade of the stock.
"Given the roughly symmetrical risk/reward profile, we'd stay on the sidelines for now until we are able to see a complete and restated set of financial statements and management opens up its communications lines again," reads one excerpt in a report headlined, "Less conviction that next big move is down; raising rating to peer perform."
The report notes risks for investors should New Century be sold "in a rescue-sale scenario."
But the report also says the stock "could rally" if management "has a sound strategy to stabilize the business and improve liquidity; and/or if pending earnings restatement proves to be less onerous than expected."
Four days later, Coren issued an update based on new information New Century disclosed about its financial problems. Coren's report said "the odds of a bankruptcy appear to have increased."
UBS' Feb. 22 report also was not entirely positive, although it said a recent slide in New Century's stock price "has improved NEW's risk/reward profile" -- NEW is a reference to New Century's stock ticker symbol.
"We therefore believe credit concerns may be priced in at current (stock price) levels, and are upgrading the stock to Neutral 2 rating on valuation," analyst Omotayo Okusanya said the report.
However, Okusanya also cut UBS's 2007 earnings expectations for New Century in light of its financial troubles.
Galvin said the UBS and Bear Stearns research raises questions about whether the firms are complying with a 2003 settlement that he and regulators in other states reached with Wall Street firms over research leading up to the burst of the dot-com bubble. Regulators then accused analysts of intentionally overvaluing stocks they covered in hopes of luring those firms' investment banking business.
"A global settlement of conflicts by research analysts at investment houses in 2003 set rules for independent analysis," Galvin said. "Recent revelations that research analysts issued positive reports on mortgage lenders to those with less than solid credit ratings even as those companies faced more and more defaults suggests that the commitment of 2003 has not been met."
Galvin's announcement Tuesday came hours after New Century Financial disclosed that the U.S. Securities and Exchange Commission was seeking documents relating to accounting errors that inflated the value of its portfolio.
Irvine, Calif.-based New Century was the nation's second-largest subprime lender. But like other subprime lenders, New Century has been having problems obtaining short-term borrowing to finance its mortgages.
Last month, New Century said it lost track of how frequently these borrowers missed payments on their mortgages. On Tuesday, the New York Stock Exchange suspended trading in shares of New Century as it began steps to delist its shares.
Galvin said his probe covers Wall Street's research into New Century as well as other lenders that also offered potentially risky mortgages that have helped fuel growing mortgage foreclosure rates in several Massachusetts communities.
He said it was too early to say whether he might issue subpoenas to other Wall Street firms besides UBS and Bear Stearns.
The subpoenas seek by March 27 all documents created by any subprime lending analyst at the two firms. Galvin also is seeking records regarding fees, commissions and other compensation earned by the firms relating to any subprime lender, and any documents sent between hedge fund clients invested in a subprime lender.
