in re: credit suisse first boston corp agilent technologies, inc....
TRANSCRIPT
UNITED STATES DISTRICT COURTDISTRICT OF MASSACHUSETTS
--------------------------------------------------------------------- XIN RE CREDIT SUISSE FIRST BOSTON CORP. Master File.AGILENT TECHNOLOGIES, INC . ANALYSTREPORTS SECURITIES LITIGATION 02 Civ. 12056 (GAO)' . . .--------------------------------------------------------------------XThis document relates to :
CONSOLIDATED AMENDEDALL ACTIONS CLASS ACTION COMPLAINT
Jury Trial Demanded--------------------------------------------------------------------- X
Lead Plaintiffs, individually and on behalf of all other persons similarly situated, by thei r
undersigned attorneys, for their complaint, allege upon personal knowledge as to themselves an d
their own acts and upon information and belief as to all other matters, based upon the investigatio n
made by and through their attorneys, which investigation included a review of analyst report s
published and disseminated to the investing public by Credit Suisse First Boston LLC ("CSFB")
concerning Agilent Technologies, Inc. ("Agilent" or the "Company"), internal communications o f
CSFB employees, and recent public filings by the Securities and Exchange Commission (th e
"SEC"), National Association of Securities Dealers ("NASD"), and the Massachusetts Securities
Division of the Office of the Secretary of the Commonwealth of Massachusetts ("Massachusett s
Securities Division") attacking the objectivity and accuracy of CSFB's analyst reports, as well a s
additional publicly available information :
NATURE OF THE CASE
1 . This is a Class Action brought on behalf of Lead Plaintiffs and all other persons o r
entities, except for Defendants, who purchased or otherwise acquired Agilent securitie s
(the "Class") during the period December 13,1999 through February 20, 2001, inclusive (the "Clas s
Period") that seeks to recover damages caused to the Class by Defendants' violations of sectio n
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10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and SEC Rule lOb- 5
promulgated thereunder.
2. This action arises out of the issuance during the Class Period by Defendant CSFB and
CSFB's Global Technology Group ("Tech Group") research analysts of analyst reports in which
Defendants recommended the purchase of Agilent securities and set lofty ratings and price target s
for those securities (the "Agilent Analyst Repo rts"), when in fact they did not believe in their own
recommendations, and knew their price targets to be unrealistically optimistic . In issuing th e
Agilent Analyst Reports, Defendants failed to disclose material, non-public, adverse informatio n
which they possessed about Agilent as well as their true opinion about Agilent's financial prospects .
Furthermore, when issuing their Agilent Analyst Reports, Defendants failed to disclose significant ,
material conflicts of interest, including that the Agilent Analyst Reports had been issued i n
exchange for investment banking business that was obtained from Agilent, and that the Tech Group
research analysts' bonuses were directly linked to the assistance provided to CSFB investmen t
banking in bringing in investment banking business . Finally, Defendants failed to disclose that th e
Tech Group research analysts did not follow CSFB's published four-tier stock rating system, bu t
rather operated it as a three-tier system .
3 . Throughout the Class Period, Defendants in their Agilent Analyst Reports maintained
a "BUY" recommendation for over a year and set price objectives as high as $87 per share, when ,
internally, Defendants did not believe their "BUY" recommendation . Internally, this practice by th e
Defendants was known as the "Agilent Two-Step," where the investing public would be given
positive information in the analyst reports that did not in fact reflect the analyst's true belief. The
practice was explained in an email between two research analysts in the Tech Group :
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Suggest you ask [Defendant] Elliot [Rogers] about the "Agilent Two-Step ." That'swhere in writing you have a buy rating (like we do on CHRT, and thank God it's nota Strong Buy) but verbally everyone knows your position .
See Exhibit I (All exhibits attached hereto) .
4 . During the Class Period, Agilent provided Defendants with internal revenue guidanc e
that was disregarded by Defendants in issuing the their analyst reports . Defendants' motivation wa s
to foster an investment banking relationship with Agilent . Not only did CSFB benefit from the
resulting investment banking fees, but Defendants Elliot Rogers and Frank Quattrone' s
compensation was tied directly to investment banking fees .
5 . On February 21, 2001, CSFB could no longer keep a "BUY" rating on Agilent so it was
reduced to "HOLD ." This downgrade represented the first ratings change to Agilent by CSFB sinc e
its initiation of coverage over a year earlier. Once the market had absorbed the downgrade o f
Agilent, the stock price dropped $3 .80 per share, or 9 percent, to $40 .20 per share, down from th e
Class Period high of $159 per share .
6 . Several government and regulatory institutions proceeded to prosecute CSFB an d
Quattrone for their conduct . On October 21, 2002, the Massachusetts Securities Division filed a
complaint charging CSFB with violations of the Massachusetts Securities Act and Chapter 11 OA o f
the Massachusetts General Laws (the " Mass . Complaint") . See Exhibit 2 .
7. In January 2003, the NASD publicly reported that it was conducting a preliminary
investigation of Quattrone for violations of NASD rules . On March 6, 2003, the NASD commenced
formal disciplinary proceedings against Quattrone .
8. In connection with a global settlement against several investment banks, on April 28 ,
2003, the SEC filed a complaint against CSFB alleging violations of federal securities laws an d
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NASD and New York Stock Exchange rules . See Exhibit 3 . That day, the SEC also announced the
simultaneous settlement of its proceedings, requiring CSFB to pay a $75 million disgorgement, a n
additional $75 million in penalties, and $50 million to provide the firm's clients with independen t
research. See Exhibit 4 .
9. On April 23, 2003, Defendant Quattrone was arrested and charged by federal prosecutors
with obstructing justice and tampering with witnesses in connection with the investigation . If he i s
convicted, he could face a maximum prison term of 25 years and fines totaling $750,000 .
JURISDICTION AND VENU E
10 . This action arises under sections 10(b) and 20(a) of the Exchange Act, 15 U.S .C .
§§ 78j(b) and 78t(a), and Rule lOb-5 promulgated thereunder by the SEC, 17 C .F.R. § 240.10b-5 .
The jurisdiction of this Court is based on section 27 of the Exchange Act, 15 U .S.C. § 78aa; and on
sections 1331 and 1337(a) of the Judicial Code, 28 U .S.C. §§ 1331, 1337(a) .
11 . Venue is proper in this District under section 27 of the Exchange Act, 15 U.S .C. §
78(aa), and section 1391(b) of the Judicial Code , 28 U.S .C . § 1391(b) . In the Administrativ e
Consent Order between the Massachusetts Securities Division and CSFB, CSFB admits th e
jurisdiction of the Massachusetts Securities Division . See Exhibit 5 . Many of the acts complaine d
of herein occurred in substantial part in the District .
12. In connection with the acts and conduct alleged herein, Defendants, directly an d
indirectly, used the means and instrumentalities of interstate commerce, including the United States
mails and the facilities of the national securities exchanges .
PARTIES
13 . Lead Plaintiff Richard Brown purchased Agilent securities during the Class Period an d
has been damaged as a result of the wrongful conduct complained of herein . See Exhibit 6 .
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14. Lead Plaintiffs Ofir and Mohendra Bawa purchased Agilent securities during the Clas s
Period and have been damaged as a result of the wrongful conduct complained of herein . See
Exhibit 7 .
15 . Defendant CSFB is part of the Credit Suisse First Boston business unit, a globa l
investment bank whose businesses include securities underwriting, sales and trading, investmen t
banking, private equity, financial advisory services, investment research, and asset management .
CSFB generates significant fees from its investment banking activities which include underwriting
initial and secondary securities offerings, and debt offerings, as well as structuring and negotiatin g
other corporate transactions such as mergers and acquisitions . The Credit Suisse First Bosto n
business unit is a subsidiary of Credit Suisse Group, which is headquartered in Switzerland .
1 6 . Defendant Elliot Rogers was the analyst in the CSFB Global Technology Group wh o
covered Agilent during most of the Class Period . He also worked with the Tech Group's banker s
to get investment banking business from Agilent . During the Class Period, Defendant Rogers
served as head and deputy head of Tech Group at CSFB .
17 . Defendant Frank P. Quattrone joined CSFB as the head of the Tech Group in th e
summer of 1998. In November 2001, CSFB CEO John L . Mack appointed Defendant Quattrone t o
CSFB' s executive board . On or around February 3, 2003 Defendant Quattrone was placed o n
administrative leave pending ongoing governmental, regulatory, and internal investigations int o
certain of his investment banking activities at CSFB. The next day, February 4, Quattrone resigned
his position at CSFB, effective immediately .
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CLASS ACTION ALLEGATION S
18 . Lead Plaintiffs bring this action as a class action pursuant to Federal Rules of Civi l
Procedure 23(a) and (b)(3) on behalf of the Class, consisting of all persons who purchased o r
otherwise acquired Agilent securities between December 13, 1999 and February 20, 2001, bot h
dates inclusive. Excluded from the Class are Defendants ; CSFB's senior management ; members of
the immediate family of Defendants Rogers, Quattrone, and CSFB's senior management ; any entity
in which any Defendant has or had a controlling interest ; and the legal representatives, heirs, succes-
sors , or assigns of any Defendant .
19 . Some 456 million shares of Agilent common stock were issued and outstanding as o f
January 31, 2001 in an actively-traded and efficient market in which millions of shares were trade d
during the Class Period . During the Class Period Agilent common stock traded on the New Yor k
Stock Exchange under the symbol "A ." The members of the Class are so numerous that joinder o f
all members is impracticable . While the exact number of Class members is unknown to Lea d
Plaintiffs, and can only be ascertained through appropriate discovery, Lead Plaintiffs believe tha t
there are thousands of members of the Class . Record owners and members of the Class may b e
identi fied from records maintained by Agilent or its transfer agent and may be noti fied of the
pendency of this action by mail, using the form of notice similar to that customarily used i n
securities class actions .
20. Lead Plaintiffs' claims are typical of the claims of the members of the Class in tha t
Lead Plaintiffs and each Class member purchased Agilent securities during the Class Period an d
sustained injury as a result .
21 . Lead Plaintiffs will fairly and adequately protect the interests of the members of th e
Class and have retained counsel competent and experienced in class action and securities litigation .
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22 . A class action is superior to other available methods for the fair and efficient
adjudication of this controversy since joinder of all Class members is impracticable . Furthermore ,
as the damages suffered by individual Class members may be relatively small, the expense an d
burden of individual litigation make it impossible for Class members to seek redress individually fo r
the wrongs done to them . There will be no difficulty in the management of this action as a clas s
action .
23 . Common questions of law and fact exist as to all members of the Class an d
predominate over any questions affecting solely individual members of the Class . Among the
questions of law and fact common to the Class :
a . Whether the federal securities laws were violated by Defendants' acts as alleged herein ;
b. Whether Defendants acted wilfully or recklessly in omitting to state and misrepresentin g
material facts ; and
c. Whether the members of the Class have sustained damages, and if so, what is the prope r
measure of damages .
FACT S
24. Defendant Quattrone was one of the highest profile technology investment bankers o f
the 1990s, earning many millions of dollars at the various banks that employed him . His succes s
stemmed from his creation and leadership of a team of investment bankers, brokers, and researc h
analysts that worked in unison to generate investment banking business . However, this syste m
violated securities laws : the research analysts' role on the team was to create false and misleading
analyst reports on the target companies in order to obtain the target companies' investment bankin g
business .
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25 . Quattrone developed his team building strategy when he was an investment banker a t
Morgan Stanley . After organizing a team of successful investment bankers, he realized he coul d
generate additional business if he also controlled research analysts and published reports. In 1995 ,
he proposed to Morgan Stanley management that he oversee the compensation of the firm' s
technology research analysts, so he could control research, and even have the final say on analys t
reports. See Peter Elkind and Mark Gimein, The Trouble With Frank, FORTUNE, September 3 ,
2001 .
26. At the time , Morgan Stanley had a "Chinese Wall," or a set of procedures and protocols
that restricted contact between bankers and research analysts, to ensure that the independence an d
objectivity of the analysts' reports was maintained . Morgan Stanley realized that Quattrone' s
proposal undermined this Chinese Wall, and refused to allow it . Id.
27 . In the spring of 1996 Quattrone left Morgan Stanley for Deutsche Morgan Grenfel l
("Deutsche Bank") ; he also took his lieutenants, George Boutros and William Brady, as well a s
other personnel . Id.
28 . At Deutsche Bank, he was given control over the research analysts . His team became
a firm-within- a-firm , which included investment bankers , brokers who catered to clients' needs, and
research analysts who wrote favorable, but not objective, reports on the clients' companies . Id.
29. Quattrone eventually came into conflict with Deutsche Bank management over other
issues. In July 1998, Quattrone, Brady and Boutros left Deutsche Bank to join CSFB, and the res t
of the team soon followed. This move was effectively a wholesale transfer of the team from
Deutsche Bank to CSFB . Practically the whole team moved, even the secretaries . In fact, CSFB
took over the lease of the team's headquarters at Palo Alto ; the team didn't even have to change
offices . Id .
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30 . Quattrone insisted on retaining a similar structure for his team in what was to becom e
CSFB's Tech Group. The four departments of the Tech Group, Corporate Finance, Mergers and
Acquisitions, Research, and Private Client Services (Tech PCS), were all headed by the same
individuals who had headed the respective departments at Deutsche Bank . Id.
31 . Quattrone's employment contract provided him with a share of revenue that his Tec h
Group generated . Quattrone also received one-half of the revenue his group generated to mete ou t
to his staff, and the ability to hire and fire any Tech Group employee, including research analysts .
He was given complete control over the Tech Group's research analysts . This was a first for CSFB ,
as it had never before given an investment banker control over a research analyst . Id.
32. Quattrone's employment contract, with its aberrant organizational structure, wa s
negotiated with CSFB chief executive officer Allen Wheat, who recruited Quattrone from Deutsch e
Bank . According to an article in the March 24, 2003 issue of BUSINESS WEEK, Wheat an d
Quattrone stayed in close contact "on matters big and small ." According to a March 4, 2003
BLOOMBERG NEWS article, Wheat was fired in July 2001 and replaced by John J . Mack, who also
backed Quattrone. In November 2000, Mack had Quattrone appointed to CSFB's Executive Board .
33. The Tech Group was very successful . In 1999, CSFB managed more US . initial publi c
offerings ("IPOs") than any other firm . In 2000, investment banking was the firm's second larges t
revenue source, generating $3 .68 billion, a 60 percent increase over the year before . As reported i n
a March 7, 2003 BLOOMBERG NEWS article ,
Between 1998, the year Quattrone joined CSFB from Deutsche Bank, and the
end of 2000, CSFB led 79 technology IPOs worth $8 .7 billion, or 74% of the bank's
107 deals, according to Irv Degraw, an IPO analyst at Falcon Capital in Sarasota,Florida. The average first-day trading gain for the IPOs was 93 .4%
Quattrone's unit generated about 12 percent to 15 percent of CSFB's revenue in1999 and 2000 .
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34. CSFB's willingness to accede to Quattrone's demands was repaid handsomely . As
reported by the October 2000 issue of BLOOMBERG MARKETS, in 2000 the Tech Group accounte d
for nearly 50% of CSFB' s fee revenue from U.S . equity investment banking (versus, for example ,
about 25% at rival Goldman, Sachs & Co .), or approximately $1 billion .
35 . Carter McClelland, head of investment and corporate banking at Banc of America
Securities, and former Quattrone boss at Deutsche Bank and Morgan Stanley, credited thi s
"Quattrone effect" with boosting CSFB's equity and merger -banking business in general . At CSFB ,
Quattrone could do no wrong and was rewarded for his efforts . Between August 1998 and the en d
of 2001, he personally received compensation of over $200 million .
CSFB's SYSTEM FOR PRODUCING FALSE AND MISLEADING REPORTS
36. The Tech Group 's interconnected management system allowed the investment banker s
to control the research analysts' ratings . The system caused research analysts to issue ratings o n
certain stocks that were higher than they otherwise would have been.
37 . During the Class Period, CSFB officially claimed a four -category stock rating syste m
that it used in its analyst reports :
"SB" (strong buy) - Stock is expected to outperform the market significantly overthe next 6-12 months and should be bought today .
"B" (buy) - A good "story" ; needs some time to develop but should outperform .Those institutions that require time to build a position should buy the stock today .
"H" (hold) - Would not buy the stock . Events may not yet be apparent that wouldmake it either a Buy or a Sell .
"S" (sell) - Would not buy if not owned and would use as a source of funds ifowned; there is nothing to make the stock outperform . If an institution wanted tostay in the same industry group, it would swap out of the stock . Potential negativeare not yet reflected in the stock - if you own it, sell it .
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38 . When issued the ratings in each report were reported over wire services without the
text of the report . The full report was not available to the public unless a person subscribed to a
service which charged a per-page fee for the report . Thus, the ratings were available for free to th e
investing public, but the text of the reports were not .
39. However, this rating system was a de-facto three-tier system . CSFB would rarely issue
"SELL" ratings, especially for current or potential investment banking clients . Furthermore, th e
"BUY" rating was reserved for banking clients . If a client company was truly a good company i t
would receive a "STRONG BUY" instead . A former CSFB analyst described the system as follows :
Hold is what you really mean when you - when you want to say sell, you say hold .
The buy is reserved for banking clients, and the strong buy is where you really want
people to be buying the stock, and I don't think you are going to find many people
who truly dispute that .
Interview Transcript of Erach DeSai, dated September 5, 2002 ("DeSai Tr .") at 34 . See Exhibit 8 .
40. The lack of a "SELL" rating is illustrated in the following email . On March 7, 2001 ,
Jamie Kiggen, a CSFB research analyst, emailed Frank Quattrone, Bill Brady, Kevin Cook, Jil l
Greenthal, and Elliot Rogers concerning Yahoo's pre-announcement of its own earnings : "Yahoo
pre-announcing, Q1 a complete disaster, as is forward outlook; stock could ultimately go below $1 0
. . . should probably be at a Sell rating (am at Hold now), but would like your input ." Brady, not
wanting to drive away future business from Yahoo, replied, "Would appreciate it if you could kee p
it at a hold still highlighting all of the negatives ." Elliot Rogers replied, "You don't need t o
establish credibility by going to a sell . Rationale for a Hold at this juncture is the more it get s
beaten up, the greater the odds of a restructuring or change of control event ." See Exhibit 9 .
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QUATTRONE CREATED AN INCENTIVE TO MAINTAIN INFLATED RATING S
41 . Quattrone maintained substantial control over the reports that research analysts in hi s
Tech Group issued. Quattrone was able to obtain such control over the research analysts becaus e
he directly determined the bulk of the research analysts' compensation and in some cases their
employment status . The bulk ofresearch analysts' compensation was in the form of a bonus, rathe r
than salary . For example, a senior level analyst's base salary might be $100,000 to $250,000, bu t
the analyst would be eligible for a bonus of $5 to $10 million or more . Complaint filed by th e
NASD against Frank Quattrone, dated March 6, 2003 ("NASD Complaint") at ¶ 31 . See Exhibit 10 .
42 . In order to determine the amount of an analyst's bonus, Quattrone required each analys t
to detail their involvement in banking deals . Investment bankers who worked with research analyst s
on specific banking deals played a role in determining that analyst's compensation . Final decision s
about bonuses were made by a core group of bankers : Quattrone, the head of corporate finance, and
the head of mergers and acquisitions . Id . at ¶ 32 .
43 . This evaluation process is illustrated in a January 4, 2000 email from Quattrone to
various CSFB Analysts :
Your trusty management team is meeting later this week to try to determinecompensation for the group and we need your cooperation if we are to do our jobcorrectly. . . . Prior to the holidays you were requested to submit a list of bankingdeals in which you participated in a lead or supporting role . . . . If you do notsubmit lists, we will base your comp on the info we have, which maybe incomplete .
See Exhibit 11 .
44. The incentive of large bonuses influenced research analysts . For example, analyst
Gilbert George stated in an email to Defendant Rogers that another analyst, Mark Wolfenberger ,
pushed IPOs of companies "that never should have gone public." He states that Wolfenberger di d
so because "we all got our bonuses for a good year ."
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45 . CSFB also routinely kept research analysts who issued negative reports from workin g
on good assignments . For example, after one analyst downgraded a particular stock, that analys t
was prevented from working on an assignment he was originally promised . DeSai Tr . at 45 . See
Exhibit 8 .
46. The Tech Group 's research analysts' lack of objectivity was widely noted. In fact, a
non-CSFB employee wrote in an analyst's evaluation that the analyst was unique in that he actuall y
gave "objective research ." The writer hoped that this analyst did not become "compromise[d] b y
CSFB's banking relationships , like so many other CSFB analysts have become . " See Exhibit 12 .
THE TECH GROUP HAD No CHINESE WALL
47 . Such a system effectively removed any "Chinese Wall" at the Tech Group . CFSB was
required, under NASD Rule 3010 and internal regulations, to maintain this Chinese Wall, but in the
Tech Group that rule was ignored .
48 . Quattrone admitted the Tech Group's lack of any Chinese Wall in a
September 30, 2000 email to Wendell Laidley and Elliot Rogers : "you should also drop th e
`research vs . banking' attitude . . . everyone is on the same team, and our culture is one o f
partnership." See Exhibit 13. According to Quattrone, there was no separation between the researc h
analysts and the bankers ; it was all "the same team ."
ANALYSTS WORKED TO GENERATE BANKING BUSINES S
49. Investment bankers used research analysts as a marketing tool to generate investmen t
banking business . Quattrone used his influence over analysts when marketing to potential clients ,
asse rting that if the client conducted investment banking business with CSFB, Quattrone would
ensure positive reports from his research analysts . When investment banking would make a pitc h
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to a prospective client accompanied by an analyst, the analyst would present the company in its best
light and it was understood that the analyst presentation would appear in the analyst's report .
50. Quattrone and the Tech Group represented to clients that the research analysts woul d
heavily promote the company, through reports and other means . For example, the Tech Group
promised , in a pitch to 724 Solutions Inc. ("724"), that the analyst covering the company "[g]ets it, "
would "pound the table" for 724, would be 724' s "strongest advocate," and would proactively
engage in "pre-marketing one-on-one meetings [with potential investors] prior to launch ." NASD
Complaint at ¶ 33 . See Exhibit 10 .
51 . Quattrone and the Tech Group told clients that research analysts would even suppor t
the company through bad times . For example, in a document entitled Credit Suisse First Bosto n
Technology Group Proposal to Virata For an Initial Public Offering, CSFB demonstrated ho w
"CSFB Stands by its Clients" in detailing how CSFB would maintain positive coverage even after
a company announced negative information . As proof, the document details how when Pilot
Networks Services, Inc ., a CSFB investment banking client, reported negative information and was
downgraded by other investment banking competitors , CSFB maintained its "STRONG BUY"
rating. See Exhibit 14 .
52. And Quattrone demanded such positive reports . For example, when an analyst wante d
to issue a "less than flattering" report on a client, Quattrone bullied and berated that analyst :
I'll have you out of here Monday morning if you say that . . . . Do you want to workin this firm? Do you want to be a team player? When it comes time for bonusreview, all this will be remembered . . . . I don't think you understand the business .. . . I've been doing this for 25 years, and I think this company's going to make ashitload of money .
Peter Elkind and Mark Gimein, The Trouble With Frank, FORTUNE, September 3, 2001 .
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53 . Research analysts were instructed by Quattrone to contact the management o f
companies that were investment banking clients prior to the issuance of the initial coverage or a
change in the rating for that company. In addition, Quattrone even allowed the companies to revie w
and comment on draft reports, and requested input from the companies on propose d
recommendations and price targets .
54. In fact, research analysts were required to keep the clients in the loop regarding
significant ratings issues . For example, when an analyst downgraded a client's stock without first
discussing it with the client, Quattrone reprimanded that analyst and stated "that is not how we d o
business around here." DeSai Tr . at 31 . See Exhibit 8 .
55 . The Tech Group often went so far as to agree to underwrite deals without first findin g
out what research analysts thought of the company . If an analyst expressed doubt about the client
after the deal with the client was in progress , the bankers in Tech Group would then assign anothe r
analyst to write the report .
56. The research analysts in the Tech Group realized that the above "unwritten rules" tha t
defined CSFB's internal parameters for acceptable analyst research completely contradicted CSFB' s
public assertion of analyst independence . On May 30, 2001, Erach DeSai, a research analyst fed u p
with these rules, emailed Rodgers and aired his complaints . In his email, DeSai described being
pressured by investment bankers to skew his analysis so as to advance the interests of CSF B
investment banking :
I have "learned" to adapt to a set of rules that have been imposed by Tech Group
banking so as to keep our corporate clients appeased . I believe that these unwritten
rules have clearly hindered my ability to be an effective analyst in my various
coverage sectors .
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[After downgrading a company called Cadence Design Systems Inc . in 1998], mybanking counterpart, informed me of unwritten rule number one : "if you can't saysomething positive, don't say anything at all . "
[Regarding Parametric Technology Corp .] in `99 : . . . I issued some cautionarycomments in the Tech Daily. . . . CEO completely lost his composure and swore tothe banker . . . that [the company] would never do any business with CSFB . . . . Atthe time, [the banker] informed me of unwritten rule number two : "why couldn'tyou just go with the flow of the other analysts, rather than try to be a contrarian? "
[Regarding Synopsys Inc . in 2000] [I] suspected a down-tick in guidance comingand wanted to moderate rating from strong buy to buy. However, banking felt thismight impact CSFB's ability to potentially do business with the companydownstream . . . . By following rules 1 & 2, I had successfully managed not to annoythe company, or banking .
I am not naive enough to lack a sense of appreciation of the role of investmentbanking (and banking generated fees) for the franchise .
See Exhibit 15 .
THE TECH GROUP MADE COMPANIES PAY FOR POSITIVE REPORT S
57. Quattrone also used his power over analyst reports to bully covered companies . If a
certain company that the Tech Group was courting seemed unlikely to give CSFB any business ,
Quattrone or others in the Tech Group might threaten that company that they would drop coverag e
of the stock, which would in turn cause the company's stock price to drop . Mass . Complaint at
¶ 27 . See Exhibit 2 .
58 . As a related example, CSFB threatened to drop coverage of a company that owe d
money to CSFB. The company capitulated , and Tech Group investment banker Chris Legg emaile d
Quattrone and others to inform them that "now that the fee issue is behind us, I would ask that w e
return [the company] to `most favored nation' status ." See Exhibit 16. Thus, Quattrone generate d
fees by pressuring companies with the analyst reports .
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CSFB KNEW OF THESE POTENTIAL PROBLEM S
59. The rest of CSFB knew of this conduct long before DeSai wrote the above email, bu t
because the Tech Group made so much money for CSFB, did nothing to curtail it . In an April 200 0
report, the Audit Department stated :
The Tech Group's relatively autonomous management structure and operatingprocedures have contributed to insufficient awareness ofCSFB policies, proceduresand culture among its staff. Consequently, the current level of [Legal andCompliance Department] and administrative resources required to support andcontrol the Tech Group's activities must be critically reevaluated to ensurenecessary controls are established and/or maintained prospectively .
NASD Complaint at ¶ 37 . See Exhibit 10 .
60 . Another Audit Department report, dated March 5, 2001, with the heading "Majo r
Action Required," identified problems in "Supervision of Related Infrastructure" with Quattron e
listed as the first of the "Responsible Executives ."
61 . Despite the warnings and recommendations in these audit reports, nothing was ever
done during the Class Period, to ensure necessary controls are established or maintained .
AGILENT
62. Agilent, incorporated in May 1999 after being spun off by Hewlett-Packard Co., is a
global diversified technology company that provides enabling solutions to markets within th e
communications, electronics, life sciences, and chemical analysis industries . The Company has
three primary businesses : Test and Measurement, Semiconductor Products, and Life Sciences an d
Chemical Analysis . The Test and Measurement segment provides standard and customize d
solutions that are used in the design, development, manufacture, installation, deployment, an d
operation of electronic equipment and systems and communications networks and services . The
Semiconductor Products segment provides semiconductor components, modules and assemblies fo r
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high-performance communications systems . The Life Sciences and Chemical Analysis segment
provides application-focused solutions that include instruments, software, consumables, an d
services that enable customers to identify, quantify, and analyze the physical and biologica l
properties of substances and products .
BACKGROUND TO THE INITIAL PUBLIC OFFERING OF AGILENT
63 . Soon after Agilent spun off from Hewlett-Packard, it sought to have its IPO . This IPO
would generate lucrative investment banking fees for the banks that underwrote it . Kris Klein, a
Tech Group investment banker, headed up CSFB's campaign to underwrite Agilent's IPO . In the
months leading up to Agilent's IPO, Defendant Rogers worked with Klein and other bankers on th e
sales pitch to the Company which helped secure CSFB's position as lead underwriter .
64. In the days leading up to the IPO, Defendant Rogers, an analyst and not a banker ,
remained instrumental in selling the deal.
In an October 29, 1999 email by Klein to Frank Quattrone and other bankers, she wrotethat : "Elliot [Rogers] has been quite helpful on salespoints, those will be ready latetomorrow along with his model ." See Exhibit 17 .
In a November 3, 1999 email from Klein to Quattrone, Rogers, and others, she states inpertinent part : "In particular, Elliot [Rogers] needs to know which accounts he shouldbe calling and when . I just received a fax from HP [Hewlett-Packard] saying theywould like for us to forward feedback on a daily basis and that they will be trackingit. . . . The salesforce should have sales materials we prepared and Elliot will discuss thedeal on the afternoon call on Thursday ." See Exhibit 18 .
In a November 5, 1999 email, Klein wrote to Rogers and others : "Please take a look atthe roadshow schedule - looks like there is a one-on-one with IDS and a meeting withScudder - we want to amend our comments according ." See Exhibit 19 .
In a November 12, 1999 email from Stefane Gruffat, CSFB employee, to Klein, Rogers
and others, she states : "Elliot [Rogers] has done a lot of work with Bret Stanley at Aim,
Tom Kemp at Alliance, and Jim Friedrichson at IDS . We shouldn't be shy at all about
asking for designations on these accounts if they come in to the book ." See Exhibit 20 .
00000440. WPD ; 1 18
AGILENT'S INITIAL PUBLIC OFFERIN G
65. Agilent went public on November 18, 1999 in a $2 .16 billion IPO of 72 million share s
priced at $30 per share. On the first day of trading, the stock price shot up to close at $44, a one-day
increase of almost 47 percent.
66. The IPO was reported in the March 2000 issue of TREASURY AND RiSK MANAGEMEN T
as being at the time "the largest IPO ever to come out of Silicon Valley." Defendant CSFB and
CSFB (Europe) Limited served as co-managing underwriters of the IPO and were allotted out of th e
total shares issued in the IPO 4, 880,000 and 801 ,600 shares , respectively, and received $7,254,24 0
in underwriting fees from Agilent .
67. As part of the spin-off of Agilent, in October 1999 the Company obtained a $50 0
million dollar credit facility, as for which CSFB served as Agilent's documentation agent .
FALSE AND MISLEAD ING STATEMENTS CONCERNING AGILEN T
68 . During the Class Period, the Tech Group engaged in a scheme to issue positiv e
recommendations and ratings on Agilent that were not warranted . For example, on November 8 ,
2000, Rogers emailed all the research analysts in the Tech Group with tips on how to write reports .
He explained how to take bad news and spin it into a misleading report, using Agilent as a n
example :
Agilent : money-losing operations supposedly fixed in our quarter . Ha!! Fatchance!! "While management plans on turning the operation around next quarter,we have chosen to give them more breathing room to allow for slippage . As aresult, our estimates are more conservative than management's guidance but allowfor upside to our EPS projections if they achieve their bogey on the state timeline . "
See Exhibit 21 . Despite this, CSFB maintained a "BUY" on Agilent for a another three months .
69 . In fact, CFSB' s misstatements on Agilent were so well known within the Tech Grou p
that the Tech Group coined the phrase "Agilent Two-Step ," which meant CSFB would issue a
00000440.WPD ; 1 19
positive rating on a company, but the Tech Group would know that the company really deserved a
lower rating .
70 . The "Agilent Two-Step" was described in an email by analyst Tim Mahon responding
to analyst Bhavin Shah, and copied to Defendant Rogers, in which Shah asked for guidanc e
regarding initial coverage on the companies Chartered Semiconductor ("CHRT") and Unite d
Microelectronics ("UMC"), both companies for which CSFB had just done investment bankin g
work. Shah, citing "banking sensitivities", stated that these companies were "[c]learly the larges t
revenue accounts for us in Asia," but because of concerns he had regarding those companies '
operations, he was considering issuing a "neutral rating ." In his email response, Mahon stated :
"Suggest you ask Elliot [Rogers] about the `Agilent Two-Step .' That's where in writing you hav e
a buy rating (like we do on CHRT, and thank God it 's not a Strong Buy) but verbally everyone
knows your position ." See Exhibit 1 .
INITIATION OF COVERAGE BY CSFB
71 . On December 13, 1999, the beginning of the Class Period, CSFB initiated coverage o f
Agilent with a rating of "BUY" in a report authored by Defendant Rogers, Shameel Arafin, an d
Kathryn Buergert . The report set a 12-month target price of $55 .
72. That day the price of Agilent stock rose to close at $45 .50, from $44 .75 the day before . '
The market clearly attributed the p rice increase to CSFB' s report . In fact , an AFX NEWS LIMITED
report on December 13, 1999, specifically attributes Agilent's price increase to CSFB's initiatio n
of coverage ; the article states that Agilent stock price went up "after CSFB started the coverage
All closing prices in this document are cited from BLOOMBERG, which calculatesclosing prices based on a "composite close"at all United States exchanges, not just the New YorkStock Exchange .
00000440 WPD; 1 20
with a buy rating." (Emphasis added.) THESTREET.COM published a similar article attributing the
price increase to CSFB' s repo rt .
DEFENDANTS MAINTAINED A "BUY" RATING ON AGILENT FOR ONE YEA R
73. With the prospects of additional investment banking business , Defendants maintaine d
a "BUY" rating on Agilent until February 21, 2001, despite the deterioration of Agilent's business .
74. On February 18, 2000, CSFB issued an Agilent Analyst Report which maintained a
"BUY" rating. The report, authored by Defendant Rogers, praised Agilent's fiscal first quarte r
financials. That day, the stock price closed at $93 .75 . In the report, Defendant Rogers increased
their fiscal 2000 and fiscal 2001 estimates .
75 . Days later , on February 22, 2000, Defendant Rogers emailed Terry Hilliard , Director
of Investor Relations at Agilent, spelling out problems with Agilent' s business .
1) TMO order growth was 6% . Communications test and semi test were highlightedas key growth drivers. One would expect communications to test growth to top10% (vs . Q4:99). Growth in Teradyne's Q4 :99 orders was above 40% sequentially,Credence's Jan :01 orders were up over that amount . Yet Agilent's TMO businessonly grew 6% despite two seemingly hot markets . What retarded your growth, orwere Communications and Semi test less hot than you let on ?
2) The 93000 reportedly was shipped with insufficient analog to satisfy many SOCapplications . The handful in the field pale by comparison to Catalyst, whoseshipment rates have topped 100 systems per quarter since Q3 :99 .
3) Rambus high-speed memory test demand is dormant throughout the industry .Generation 1 Rambus (for games) is your strong suit, and may account for a third ofyour business . If high speed Rambus (vs . DDR or SDRAM) doesn't take off, it willbe difficult for Agilent to break into the high volume DRAM memory test market,owned by Advantest at the moment .
See Exhibit 22. The February 18 research repo rt does not discuss the latter two issues at all, and
with regard to the first issue, it labels the 6% TMO order growth as "reasonable," whereas th e
internal email expected a 40% growth rate .
00000440 . W PD: 1 21
76 . On March 6, 2000, Agilent closed at the Class Period high of $159 per share .
77. The Tech Group , including research analysts, maintained a close relationship with
Agilent, hoping to generate additional banking business . In a March 18, 2000 email from Kris Klein
to Frank Quattrone, Bill Brady, John Hodge, Bob Curley, and George Boutros, she lists all of th e
business oppo rtunities that CSFB has with Agilent :
• we continue to help them evaluate a $10 billion acquisition .
• Medical products sellside - this is a transaction that in time will happen as it makes nosense for them to continue to own it . $2-3 billion business with a very low tax basis . .
• Communications acquisition ideas - Ray Carey and I met with head of corporatedevelopment to discuss some ideas here. So far they have done small technology drivendeals (no bankers). Ray has been very about forward via email interesting opportunitiesfor them. They are looking at Digital Lightwave but low probability there . . . .
• Acquisition financing - have had several conversations with the treasury group - on aconceptual basis . CFO hates current capital structure and wants to use cash acquisitionsas a means to increase leverage if possible .
• Share repurchase/capital structure analysis - asked for our point of view on repurchasesand how to approach . $500 million in cash, no debt, "under-rated" relative to strongcash flow at BBB. Meeting with them the first week in April in advance of boardmeeting where they plan to discuss the topic . Haratunian will join and we will focus onASR. They will have a lot of shares coming out with the spin in May .
See Exhibit 23.
78 . On May 19, 2000, CSFB issued an analyst report on Agilent which maintained a
"BUY" rating . The analyst report, authored by Defendant Rogers, analyzed Agilent 's second
quarter results . That day, the stock closed at $66 .625 per share .
79. On July 20, 2000, Agilent announced that the third quarter's earnings would fall short
of forecasts, due to manufacturing constraints, component shortages, and weaker sales in tw o
divisions. That day, shares dropped from $74 .063 to close at $54, a 27% drop .
00000440, W P D: 1 22
80. In an attempt to mitigate the bad news, on July 21, 2001, CSFB issued a report ,
authored by Rogers , maintaining the "BUY" rating. That day, the stock dropped to $48 .063 pe r
share, but would have dropped further had CSFB not reassured the market with its "BUY "
recommendation .
81 . At that time , Rogers privately expressed concerns about Agilent . On August 12, 2000 ,
an acquaintance emailed him asking about Agilent, given that the stock dropped to "original spin-off
lows ." Rogers replied, "[1]et's see what they announce thurs . pm. Hopefully some meaningfu l
restructuring of the two problem divisions . Absent that would not be aggressive despite the pric e
pullback." See Exhibit 24 .
82 . On August 18, 2000, CSFB issued an analyst report on Agilent maintaining its "BUY "
rating. The report, authored by Rogers, analyzed third quarter results . That day, the stock rose t o
close at $56.375 per share, up from $55 .75 the day before. In the report, Rogers details only minor
restructuring by Agilent. Contrary to the above email in which Rogers advised caution in th e
absence of "meaningful restructuring ," he recommended to the public that they continue to "BUY . "
83 . In September 2000, Rogers informed Agilent that another analyst would be taking hi s
place covering Agilent . On September 19, 2000, Klein emailed Quattrone, Brady, and Boutros t o
update them on potential future banking business, and noted that while CSFB was actively courtin g
Agilent for more business, Agilent had concerns about the change in research analysts, and wante d
to ensure reliable coverage :
Agilent is very focused on positioning the company as a communications company
and we intend to increase the level of strategic discussions in that area going
forward . They are concerned about shift in research coverage as Elliott [Rogers] is
transitioning the name and I am working with him to manage that process .
See Exhibit 25 .
00000440 . WPD; 1 23
84, On September 29, 2000, CSFB issued an analyst report on Agilent maintaining it s
"BUY" rating. The report, titled "An Expanding Presence in Attractive Communications Markets, "
was authored by CSFB analyst Kathryn Buergert . The report represented that Agilent was
intelligently growing its business and positioning itself in important new markets; such moves
would provide future revenues and profits . The report set a 12-month target price of $87 per share ,
which represented an 81 % increase over the then current market price of approximately $48 pe r
share. That day, the stock rose to close at $48 .938 per share, from $47 .945 the day before .
85 . On November 21, 2000, CSFB issued an analyst report on Agilent maintaining it s
"BUY" rating . The report, authored by Buergert, analyzed fourth quarter and fiscal year-end 200 0
results . The report reset the 12-month target price to $55 per share . That day, the stock rose t o
close at $48 .625, from $44 .625 the day before .
86. On December 6, 2000, CSFB issued an analyst report on Agilent maintaining it s
"BUY" rating . The report, authored by Buerge rt and Shameel Arafin, analyzed the acquisition of
Objective Systems Integrators, Inc . That day, the stock closed at $52 .
DOWNGRADE OF AGILEN T
87. Ina morning report issued on February 21, 2001, Agilent revealed that it was reducing
its second quarter profit forecast . At this point, Defendants realized that, despite the potential for
future investment banking business , they could no longer risk maintaining a "BUY" rating on
Agilent . That day CSFB issued a report reducing its rating from "BUY" to "HOLD ." That day, the
price of Agilent stock dropped to close at $40 .20, from $44 the day before . By February 28, 2001 ,
Agilent closed at $36 per share, a drop of $8 or 18 percent from the February 20, 2001 close .
88. During the Class Period, CSFB maintained a "BUY" rating on Agilent and provide d
supposedly objective analysis, which reassured the market that Agilent was worth its contemporar y
00000440 . WPD; 1 24
price. The recommendations given in CSFB's reports helped to move the stock price, which both
AFX and THESTREET.coM both attested to, as explained in ¶ 72, supra. Had the market known tha t
CSFB's recommendations above were not based upon objective analysis, but were inflated in a n
attempt to gain investment banking business from Agilent, the public' s perception of Agilent woul d
have been negatively impacted .
DEFENDANTS ' MATERIAL OMISSIONS AND MISREPRESENTATIONS
IN THE AGILENT ANALYST REPORT S
89. The statements made by Defendants in the Agilent Analyst Reports in ¶¶ 71,74, 78, 80 ,
82, and 84-86 herein were false and misleading because :
a. Defendants were aware of adverse nonpublic information concerning Agilent yet the y
maintained a "BUY" on the stock ;
b. During the Class Period, Defendants made statements about Agilent that had n o
factual support ;
c . Defendants made these statements with the express intention of inflating Agilent' s
stock price to secure lucrative investment banking business from Agilent ;
d . Defendants failed to disclose :
(i) that they initiated coverage of and issued positive recommendations on Agilen t
stock in order to secure investment banking business from Agilent ;
(ii) that research analysts were compensated based on their contribution to CSFB s
investment banking deals ;
(iii) that CSFB's research analysts played a key role at investment banking pitche s
and implicitly promised favorable research to help CSFB obtain investment bankin g
deals from potential clients ;
00000440 . WPD; 1 25
(iv) that the Agilent Analyst Reports were neither objective, independent, no r
reliable as a result of the investment banking's control of the Tech Group ;
(v) that CSFB's investment bankers controlled the Tech Group's research;
(vi) that CSFB's investment bankers allowed its investment banking clients t o
control research ;
(iv) that CSFB's investment bankers pressured company managers to pay fo r
positive research coverage; and
(v) that CSFB' s "unwritten" rules required research analysts to provide positive
research coverage for its investment banking clients .
e. Defendants failed to disclose that the rating system publicly represented by
Defendants to be based on a four-point system was instead a de facto three-point system, as
Defendants never used the "SELL" ratings even when Defendants' own internally-hel d
opinion was that there was cause for concern about Agilent's business and financia l
condition and prospects ;
f. that CSFB's practice of allowing research analysts to discuss a proposed rating wit h
company executives in advance of publishing a rating caused undue pressure on research
analysts to initiate or maintain positive research coverage and compromised analys t
coverage .
90. Defendants acted with scienter when they issued the false and misleading Agilen t
Analyst Reports.
91 . Defendants finally lowered Agilent's rating from "BUY" to "HOLD" after the stoc k
had fallen more than 72 percent from its Class Period high of $159 per share which had bee n
attained less than 3 months after initiation of coverage .
00000440 .WPD; 1 26
GOVERNMENTAL AND REGULATORY INVESTIGATIONS INTO CSFB AND OUATTRON E
92 . On September 12, 2002 , an a rticle in the NEW YORK TIMES announced that as part o f
an ongoing investigation, Massachusetts state securities regulators had been investigating whethe r
research analysts ' reports at CSFB had been tainted by the firm 's desire to win investment bankin g
business .
93 . On or about October 21, 2002, the Mass . Complaint was filed . The action charged that
research analysts in CSFB's Tech Group worked for and were controlled by investment bankin g
personnel of CSFB, which resulted in research analysts being unduly influenced to issue favorabl e
ratings on companies for which CSFB did investment banking work or sought to do investment
banking work. The action further charged that CSFB materially misled the investing public b y
disseminating fraudulent statements of fact concerning the companies covered by its researc h
analysts, and by failing to disclose its research analysts' conflicts of interest .
94. The Mass. Complaint, which is based on Secretary Galvin's review of over 80,00 0
CSFB emails, reviewed as part of his office's investigation of research analysts' conflicts at CSFB,
sought $2,118,820 in fines and expenses, a cease and desist order from further violations, th e
complete separation of research from investment banking, and the appointment of an independen t
compliance monitor .
95 . In its "Conclusion" section, the Mass . Complaint states :
A sophisticated review of the Tech Group's dealings show that CSFB touted"independent research" and instead used its research to market its investmentbanking business . CSFB also rewarded employees and company management withinvestment opportunities . This was hidden from the public, who relied on theresearch information . Thus, CSFB perpetrated fraud by the disseminatedmaterial misstatements of facts into the marketplace . [(Id.) (emphasis added) . ]
00000440 .WPD; 1 27
96, On December 20, 2002, the New York Attorney General announced that as part of a
settlement with CSFB and other investment banks "to resolve issues of conflicts at investmen t
banking firms," CSFB agreed to pay $200 million . The terms of agreement also include 1) the
insulation of research analysts from investment banking pressure ; 2) an obligation to furnish
independent research ; and 3) disclosure of analyst recommendations .
97 . On January 16, 2003, the NASD served Quattrone with a Wells Notice . This notice
signified that the NASD had made a preliminary determination to recommend that a disciplinar y
action be authorized against Quattrone for violations uncovered during its investigation.
98. On March 6, 2003, the Enforcement Department of the NASD commenced disciplinar y
proceedings against Defendant Quattrone for, among other things, failing to properly supervise th e
research analysts in the Tech Group, over which he had demanded, and received , as part of hi s
employment negotiations with CSFB, complete control upon his arrival at CSFB . The NASD
alleged in its Complaint that based on its investigation, "by encouraging, allowing, and participatin g
in the improper practices alleged in this complaint, Quattrone violated NASD Rules 3060, 2110, an d
3010." See Exhibit 10 .
99. According to the NASD, "[b]y creating the inherently flawed reporting and supervisor y
structure under which these improper practices flourished, and by allowing and endorsing thes e
practices, Quattrone violated NASD rules ." Mary L. Schapiro, NASD's Vice Chairman and
President of Regulatory Policy and Oversight, was quoted in the NASD's March 3, 2003 pres s
release as stating that :
[r]ecent investigations into conflicts of interest on Wall Street have shown that intoo many cases in the past, investors' interests were compromised for greaterinvestment banking revenues . . . . In restoring integrity to our markets and investorconfidence in our industry, it is absolutely necessary that we hold individualsresponsible for these abuses accountable . Institutions can only act through peopl e
00000440 .WPD; 1 28
and when individuals violate our rules, enforcement actions with meaningfulsanctions must follow .
100. On April 23, 2003, Frank Quattrone was arrested and charged by federal prosecutors
with obstructing justice and tampering with witnesses ; he is alleged to have advised his Tech Group
to destroy documents to keep investigators from finding them . If he is convicted, he could face a
maximum prison term of 25 years and fines totaling $750,000 .
101 . Quattrone's perspective on document retention (or lack thereof) was reflected in a
December 5, 2000 email to the CSFB Tech Group's Investment Banking Department :
With the recent tumble in stock prices, and many deals now trading below issueprice, the securities litigation bar is expected to [launch] an all out assault on brokentech IPOs .
In the spirit of the end of the year (and the slow down in corporate financework), we want to reminding (sic) you of the CSFB document retention policy . . .
"For any securities offering, the Designated Member should create a transaction . fileconsisting of (i) all filings made with the SEC in connection with an SEC registeredoffering or, in an unregistered offering, the final offering memorandum used in aRule 144A offering or other form of private placement, (ii) the original executedunderwriting or placement agent agreements, (iii) the original executed comfortletters from accountants, (iv) the original executed opinions of counsel and (v) acompleted document checklist . . . In order to avoid confusion and ensure greatercompliance with these policies, no file categories other than those set forth in . . .may be created in connection with any CSFB managed securities offering withoutthe approval of your team leader and a lawyer in the IBD Legal and ComplianceDepartment or the CDG Manager . "
So what does it mean? Generally speaking, if it is not (i) - (v), it should not be leftin the file following completion of the transaction . That means no notes, no drafts,no valuation analysis, no copies of the roadshow, no markups, no selling memos, noIBC or EVC memos, no internal memos .
Note that if a lawsuit is instituted, our normal document retention policy issuspended and any cleaning of files is prohibited under the CSFB guidelines (sinceit constitutes the destruction of evidence) . We strongly suggest that before youleave for the holidays, you should catch up on file cleanup .
See Exhibit 26 .
00000 ao.WPD; t 29
102. On April 24, 2003, THE WALL STREET JOURNAL reported :
Frank Quattrone became the most powerful Wall Street figure since Michael Milkento face criminal charges yesterday, when he was arrested and charged by federalprosecutors with obstructing justice and tampering with witnesses .
U.S . Attorney James Comey of Manhattan said he brought charges against Mr .Quattrone to signal the importance of voluntary compliance with regulatoryinquiries. Mr. Comey cited email evidence that Mr. Quattrone, who had beenamong Silicon Valley's most influential bankers during the technology boom of the1990s, told colleagues to "clean up" their files in December 2000, despite knowingthat some of them were being sought by subpoenas from three different regulators .
103. On April 28, 2003, the SEC announced that it had settled charges against CSF B
arising from its investigation of research analyst conflicts of interest . The settlement is part of th e
global settlement that CSFB and other brokerage firms have reached with the SEC, NASD, Th e
New York Stock Exchange , the New York Attorney General , and other state regulators .
104. In connection with the settlement, on April 28, 2003, the SEC filed a complain t
against CSFB in the U . S . District Court for the Southe rn District of New York, alleging violations
of the federal securities laws and NASD and NYSE rules . See Exhibit 3 . The SEC's complaint
alleges that from at least July 1998 through December 2001, research analysts at CSFB were subjec t
to inappropriate influence by investment banking at the firm . In addition, the complaint alleges tha t
CSFB published false or misleading research, published exaggerated or unwarranted research tha t
lacked a reasonable basis in fact, engaged in improper "spinning" activities relating to IPOs, an d
failed to maintain appropriate supervision over its research and investment banking operations .
105 . CSFB has agreed to settle the SEC's action, and has consented, without admitting o r
denying the allegations in the Complaint, to the entry of a final judgment that, if approved by th e
court, permanently enjoins CSFB from violations of the federal securities laws and NASD and
NYSE rules. The final judgment also orders CSFB to make payments of $75 million a s
00000440 .WPD; 1 30
disgorgement and an additional $75 million in penalties and to pay, over 5 years, $50 million t o
provide the firm's clients with independent research . See Exhibit 4. In addition, the final
judgement orders CSFB to implement structural reforms and provide enhanced disclosure t o
investors, including a broad range of changes relating to the operations of its equity research an d
investment banking operations .
106. With regard to CSFB' s coverage of Agilent, the SEC Complaint stated :
Agilent
57. In certain instances, CSFB equity research analysts maintained positive ratingsin published research reports, while conveying a more negative outlook regardingthe stock to their institutional customers within the text of the written researchreports . In describing the ratings used from July 1998 through 2001 and beyond,research analysts did not use the same description of the rating as CSFB's publisheddescription . According to one senior research analyst :
Different analysts have different ways they would interpret a hold
rating . . . And I think it's probably fair to say that for a number of
analysts, particularly because of the fear of backlash that we get
from a company . . . or . . . that we get from institutional investors,
there would be a hesitancy to use the "sell" rating . So analysts did
have a tendency to somehow use a hold with more of a negative
slant to it .
[T]he monthly review and comment we would verbally describewhat we meant by each of the four ratings that I mentioned before .But there was a lot of latitude left to the individual analyst to kindof use the rating I don't want to say in a custom tailored way, butcertainly there would be some judgment applied by the analyst interms of how they would use this specific rating to their sector .
58. This approach manifested itself with regard to Agilent . CSFB was a co-leadmanager for the company's November 17, 1999 IPO, earning more than $5 .7million in fees therefrom. A technology research analyst initiated coverage of thecompany with a "buy" rating on December 13, 1999 . On July 21, 2000, the analystreiterated his "buy" rating, while also describing in his research report that thecompany had announced that its healthcare business was likely to have an operatingloss at least as wide as the previous quarter's loss of $30 million . The reportreiterating the "buy" rating also disclosed in the body of the report that the compan y
00000440 . WPD; 1 31
announced that third quarter earnings would be 18-22 cents per share, compared tothe 35 cents average estimate of analysts polled .
59 . The report also indicated that "Agilent is rated Buy, only in the most generoussense, though in the short term we would only buy it on extreme weakness, with a12-24 month time horizon . Our near-term concern is that problems are not typicallyresolved in one or two quarters ."
60. CSFB maintained its "buy" rating until February 2001 when it finallydowngraded to "hold ." This came only after Agilent preannounced second quarterrevenues and suspended earnings guidance for the remainder of the year, citing a"dramatic slowdown in customer demand ." CSFB's positive rating of Agilent foran extended period of time despite negative news was cited by a research analyst inCSFB as an example of maintaining a positive rating while signaling negative newsto large institutional clients .
61 . Following the July 21, 2000 report on Agilent, a CSFB technology researchanalyst cited the coverage of Agilent to another CSFB research analyst who wasfacing some "tough decisions" on rating two companies that CSFB had helped takepublic . The first analyst noted that he wanted to give one of the companies a neutralrating but was "wondering how to approach this based on banking sensitivities ."The other analyst responded by suggesting that the analyst "ask [the analyst whocovered Agilent for the July 21, 2000 report] about the `Agilent Two-Step' . That'swhere in writing you have a buy rating (like we do on [the other company], andthank God it's not a strong buy) but verbally everyone knows your position . "
SEC Complaint . See Exhibit 3 .
AS AND FOR AFIRST CLAIM FOR RELIE F
(Against All Defendants Under Section 10(b),Exchange Act, and SEC Rule 10b-5)
107. Lead Plaintiffs incorporate by reference the allegations set forth above as if fully se t
forth herein .
108. During the Class Period, Defendants carried out a plan, scheme, and course of conduc t
that was intended to and did : (i) deceive the investing public, including Lead Plaintiffs and other
Class members, as alleged herein ; (ii) artificially inflate the market prices of Agilent securities ; and
(iii) cause Lead Plaintiffs and other Class members to purchase Agilent securities at artificially
00000440 . WPD ; 1 32
inflated prices . In furtherance of this unlawful scheme, plan, course of conduct, Defendants, an d
each of them, took the actions set forth herein .
109. Defendants: (a) employed devices, schemes, and artifices to defraud ; (b) made untrue
statements of material fact and/or omitted to state material facts necessary to make the statement s
not misleading; and (c) engaged in acts, practices, and a course of business which operated as a
fraud and deceit upon the purchasers of Agilent securities in violation of section 10(b) of th e
Exchange Act and Rule 1 Ob-5 promulgated thereunder .
110. During the Class Period, Defendants made untrue statements of material fact and/o r
omitted to state material facts necessary to make the statements, in light of the circumstances under
which they were made , not misleading , all in violation of section 10(b) of the Exchange Act and
Rule 10b-5(b) . Defendants' material misrepresentations and omissions concerned, inter alia :
(a) Defendants were aware of adverse nonpublic information concerning Agilent yet the y
maintained a "BUY" on the stock ; (b) Defendants made statements about Agilent that had no factua l
support ; (c) Defendants made these statements with the express intention of inflating Agilent's stoc k
price to secure lucrative investment banking business from Agilent ; (d) Defendants failed to
disclose: (i) that they initiated coverage of and issued positive recommendations on Agilent stoc k
in order to secure investment banking business from Agilent ; (ii) that research analysts wer e
compensated based on their contribution to CSFB's investment banking deals ; and (iii) that CSFB' s
research analysts played a key role at investment banking pitches and implicitly promised favorabl e
research to help CSFB obtain investment banking deals from potential clients ; (e) Defendants failed
to disclose : (i) that the Agilent Analyst Repo rts were neither objective , independent, nor reliable a s
a result of the investment banking's control of the Tech Group ; (ii) that CSFB's investment banker s
controlled the Tech Group' s research ; (iii) that CSFB ' s investment bankers allowed its investment
00000440 . WPD : 1 33
banking clients to control research ; (iv) that CSFB's investment bankers pressured compan y
managers to pay for positive research coverage ; and (v) that CSFB's "unwritten" rules require d
research analysts to provide positive research coverage for its investment banking clients ;
(f) Defendants failed to disclose that the rating system publicly represented by Defendants to b e
based on a four-point system was instead a de facto three-point system, as Defendants never use d
the "SELL" ratings even when Defendants ' own inte rnally-held opinion was that there was cause fo r
concern about Agilent's business and financial condition and prospects ; and (g) that CSFB' s
practice of allowing research analysts to discuss a proposed rating with company executives i n
advance of publishing a rating caused undue pressure on research analysts to initiate or maintai n
positive research coverage and compromised analyst coverage .
111 . Defendants' material misrepresentations and/or omissions were done knowingly o r
with reckless disregard for the purpose and effect of obtaining lucrative investment banking
business from Agilent .
112 . The members of the Class reasonably relied upon the integrity of the market in whic h
Agilent securities traded .
113 . Defendant CSFB was required to comply with all relevant SEC and NAS D
regulations, including without limitations those set forth herein . In addition, Defendants had a duty
to fully disclose the truth conce rning its business practices alleged herein by virtue of its issuance
of analyst reports to investors, as a result of Defendant CSFB' s status as a registered U .S .
broker/dealer and its wrongful activities in such capacity alleged herein, and as a result of th e
integrated disclosure provisions of the SEC as embodied in SEC Regulations S-X [17 C.F.R .
§ 210 .1, et sea .], S-K [17 C .F.R. § 229.10, et seq.], and other SEC regulations .
00000440 .WPD; 1 34
114. Throughout the Class Period, Defendants' material misrepresentations and omission s
induced a disparity between the transaction price and the true "investment quality" of Agilen t
securities . As a result of the dissemination of the materially false and misleading information an d
failure to disclose material facts, as set forth above, the market price of Agilent securities wa s
artificially inflated during the Class Period, and Lead Plaintiffs and the Class were deceived as t o
the true investment quality of Agilent securities . In ignorance of the fact that the market price o f
Agilent securities was artificially inflated, and relying directly or indirectly on the false an d
misleading statements made by Defendants, or upon the integrity of the market in which th e
securities trade, and/or on the absence of material adverse information that was known to o r
recklessly disregarded by Defendants but not disclosed in public statements by Defendants durin g
the Class Period, Lead Plaintiffs and the other members of the Class purchased or otherwis e
acquired Agiient securities during the Class Period at artificially inflated prices and were damage d
thereby.
115. At the time of said misrepresentations and omissions , Lead Plaintiffs and the other
members of the Class were ignorant of their falsity, and believed them to be true . Had Lead
Plaintiffs and the other members of the Class known of the truth of the misrepresentations or known
of the omitted material facts, Lead Plaintiffs and the other members of the Class would not hav e
purchased or otherwise acquired their Agilent securities during the Class Period, or, if they had
purchased or otherwise acquired such stock during the Class Period, they would not have done s o
at the artificially inflated prices which they paid .
116. Lead Plaintiffs and the other members of the Class were injured because the risks tha t
materialized were risks of which they were unaware as a result of Defendants' scheme to defrau d
00000440 .WPD; 1 35
as alleged herein. Absent Defendants' wrongful conduct, Lead Plaintiffs and the members of th e
Class would not have been injured .
117 . In connection with their unlawful plan , scheme, and course of conduct alleged herein
Defendants used the means or instrumentalities of interstate commerce and the mails .
118 . By virtue of the foregoing, Defendants each violated section 10(b) of the Exchang e
Act and rule l Ob-5 .
119. As a direct and proximate result of Defendants' scheme to defraud, Lead Plaintiff s
and the other members of the Class suffered damages in connection with their purchases of Agilen t
securities in an amount to be proven at trial .
120. This action is brought within two years after the discovery of the facts constituting
this cause of action and not more than five years after such cause of action accrued .
AS AND FOR ASECOND CLAIM FOR RELIE F
(Against Defendants CSFB and QuattroneUnder Section 20(a), Exchange Act )
121 . Lead Plaintiffs incorporate by reference the allegations set forth above as if fully se t
forth herein .
122. This claim is asserted against Defendants CSFB and Quattrone and is based on sectio n
20(a) of the Exchange Act .
123 . Defendants CSFB and Quattrone each acted as a controlling person of Defendan t
Rogers within the meaning of section 20(a) of the Exchange Act . By reason of CSFB's an d
Quattrone's position at all relevant times hereto as Rogers' employer, CSFB and Quattrone had th e
power and authority to influence and control, directly or indirectly, Rogers, including causing o r
preventing the wrongful conduct complained of herein, and did exercise such power and authority .
00000440. W 'n; 1 36
124. By reason of the foregoing, CSFB and Quattrone are liable jointly and severally wit h
and to the same extent as Rogers for Rogers' violations of section 10(b) of the Exchange Act and
Rule lOb-5 .
PRAYER FOR RELIEF
WHEREFORE, Lead Plaintiffs, on behalf of themselves and the Class, pray far judgmen t
as follows :
i . Declaring this action to be a proper Plaintiff class action maintainable pursuant to rule s
23(a) and 23(b)(3) of the Federal Rules of Civil Procedure and declaring Lead Plaintiffs
to be proper representatives of the Class .
ii . Awarding Lead Plaintiffs and all of the other members of the Class damages in a n
amount to be proven at trial, together with prejudgment interest thereon ;
iii . Awarding Lead Plaintiffs the costs and expenses incurred in this action, including
reasonable attorneys', accountants', and experts' fees ; and
iv. Granting Lead Plaintiffs and the other members of the Class such other and furthe r
relief as the Court deems just and proper .
00000440 . WPD; 1 37
DEMAND FOR A JURY TRIAL
Lead Plaintiffs hereby demand a trial by jury.
Dated: August 25, 2003GILMAN AND PASTOR, LLP
Bv :David Pastor (BBO No . 391000)
Stonehill Corporate Center999 Broadway, Suite 500Saugus, MA 01906Telephone : (781) 231-7850Facsimile: (781) 231-7840
Liaison Counsel
RABIN , MURRAY & FRANK LLPB rian P . MurrayEric J . BelfiGrego ry B . Linkh275 Madison AvenueNew York, NY 10016Telephone : (212) 682-1818Facsimile: (212) 682-1892
GLANCY & BINKOW LLPLionel Z . GlancyMichael Goldberg1801 Avenue of the Stars, Suite 311T c An eles California 9006 7
CERTIFICATE OF SERVICE Telephone: (310) 201-9150
1 Werehv C@rtifu That A Tr"a Co of Facsimile : (310) 201-916 0PY
The Above Document Was Served UponThe Attorney Of Record For Each Other
Party Mail ( tin ` s%~?
Co-Lead Counsel for Lead Plaintiffs and the Class
00000440.WPD 1 38