Breaking News from The Globe and Mail

Mathew Ingram

Tuesday, August 12, 2003

CIBC World Markets is banning e-mail between its analysts and investment bankers, and other brokerage firms are said to be considering similar moves to shore up the "Chinese wall" between the two departments. But why stop there? Why not give analysts their own washrooms, so they don't run into bankers accidentally? Better yet, segregate the two in separate buildings, monitor their telephone calls, and comb the in-house baseball league for any illicit relationships.

Some analysts might actually be happy with the new rule, since it could cut down on the amount of time-consuming e-mails they have to wade through on their BlackBerrys every morning. It means there won't be any more desperate messages from investment bankers, begging for an upgrade on the income trust the firm underwrote. The only downside is that the rule doesn't apply to system-wide messages from people who have a cottage to rent or kittens for sale.

At the same time, however, banning e-mail seems like a finger in the dike sort of effort. If an investment banker and an analyst want to have a chat about a stock, couldn't they just go for lunch, or bring it up during one of the innumerable golf tournaments that brokers are invited to? And that's not to mention the prospect of beers after work, or bumping into someone at the health club. There's also a device known as a "telephone," which lots of people used to use before e-mail.

So why is e-mail being targeted? Because it can be saved -- and anything that is saved can also be used as evidence. In other words, the real impetus for the ban is Eliot Spitzer. New York's Attorney General has been riding a wave of publicity thanks to the pearls of wisdom he and his team have uncovered in various e-mail databases, discoveries that he has used as a lever to pry more than a billion dollars in legal settlements out of Wall Street's leading brokerage firms.

By now, we've all heard about the e-mails that Merrill Lynch's former star Internet analyst Henry Blodget sent, calling various Net companies "a piece of crap," "a dog" and "a piece of junk," as well as other colourful colloquialisms. He did so even though his firm was issuing reports urging investors to buy stock in those same companies. In May 2002, Merrill agreed to pay $100-million (U.S.) to settle the case (without admitting wrongdoing) and promised that it would change its practices.

The New York Attorney's office reportedly seized more than 30,000 e-mails from Merrill Lynch's computer department and filtered through them to make its case, and Merrill was just the beginning. Mr. Spitzer grabbed hard disks full of e-mails from Goldman Sachs, Salomon Smith Barney, UBS Warburg and other leading firms, and found what he saw as hard evidence of similar conflicts of interest between the research department and the investment banking business.

An e-mail recovered from a Goldman Sachs analyst, for example, said that his most important goals for 2000 were "1) get more investment banking revenue, 2) get more investment banking revenue and 3) get more investment banking revenue." Salomon Smith Barney telecom analyst Jack Grubman bragged about the fact that he had brought in $300-million in trading commissions and $400-million in banking fees, and that he was advising WorldCom on strategy.

As the telling e-mails continued to roll in, the Securities and Exchange Commission, the New York Stock Exchange and Mr. Spitzer's office cobbled together a $1.4-billion settlement deal with half a dozen leading brokerage firms, including promises to maintain a strict code of non-association between them and their underwriting departments. Among other things, Merrill Lynch prevents certain employees from conversing with others using an "instant message" system.

No Canadian brokerage firms were involved in Mr. Spitzer's sweep, nor have there been any similar e-mail-based investigations in Canada, but clearly CIBC and some other firms are concerned about the potential legal liability if an e-mail trail makes their Chinese wall look like Swiss cheese. CIBC started the new procedure at its U.S. operation, and is now rolling it out closer to home. But will an e-mail ban achieve anything that existing practices don't? Unlikely.

If an investment banker wants to talk to an analyst about his research on a particular company, there is little a firm can do to stop him -- just as there will always be a way for a firm to reward an analyst for coverage of a certain company if it wants to do so, or to use that research when trolling for underwriting business. And some analysts will likely continue to think one thing about a stock and say another in their research, if they decide that doing so is in their best interests.

Just because those kinds of conflicts no longer appear in an e-mail message doesn't mean they have ceased to exist -- it just makes them harder to prove. Brokerage firms would be better off focusing on the root of the problem rather than a symptom.

E-mail Mathew Ingram at

Look for exclusive Mathew Ingram commentary at GlobeInvestorGold

© The Globe and Mail