During recent investigations into the reliability of Lehman Brothers' stock ratings, emails were found that recorded analysts acknowledging inconsistencies between their ratings and the values of the companies they were evaluating. The SEC, NASD, NYSE, NASAA, and the New York Attorney General began extensive, "global" investigations in an effort to discover whether analysts of major Wall Street firms were recommending companies according to their actual values or based on investment banking business they were offering their firms. The Alabama Securities Commission assisted the league of regulators in scrutinizing Lehman Brothers' correspondence records.
The SEC quoted Lehman Brothers' analysts in a litigation release it issued after the April 28, 2003 investment firm settlements.
"Well," a Lehman Brothers analyst explained to an investor, "Ratings and price targets are fairly meaningless anyways...but, yes, the 'little guy' who isn't smart about the nuances may get misled - such is the nature of my business." The analyst carried research on Razorfish Inc., a "digital solutions provider."
In another email, a Lehman analyst that led research on RSL Communications expressed frustration to his supervisor: "Enough is enough. It's hard to be right about stocks, it's even harder to build customer relationships when all your companies blow up, you knew they were going to, and you couldn't say anything...for the record, I have attempted to downgrade RSLC THREE times over the last year, but have been held off for banking reasons each time."
Charges against Lehman Brothers
Formal charges against Lehman Brothers, released in the SEC's complaint, specified that the firm had allowed its investment bankers to compromise the necessary independence of its analysts. By failing to adequately supervise both its bankers and its analysts, Lehman Brothers created an internal system that allowed "conflicts of interest" to persist. Investment bankers had a say in analyst reviews, and analyst compensation was tied (by contract in six cases) to the amount of money the companies they covered brought into the firm. These conditions contributed to a situation in which analysts were rewarded for keeping ratings consistently high, and in which they suffered loss if they lowered ratings.
To settle the charges, the SEC required Lehman Brothers to implement a series of reforms and pay $80 million. The reform requirements of the SEC have obligated Lehman Brothers to keep its research and banking departments separate, explain on the front page of each research report any banking interest it has with the company, and create a chart on its website that gives investors information on individual analysts and the firms rating scale.